Federal Reserve President Ben Bernanke announced in June that the FED plans to reduce its bond purchasing program or also known as "quantitative easing" later this year and could end the program by the middle of 2014 - that is, if the economy shows significant improvement. This plan caused the bond market to panic and sent the interest rates to shoot up -- According to Huffington Post report.
The FED's buying of Treasury and mortgage bonds have helped keep long-term interest rates at historic lows. The low interest rates have helped the housing market to go back on its feet, drive the stocks to record highs and slowly help the country crawl out of recession. The end of the bond-buying program may likely result to higher mortgage interest rates and other consumer and business loans.
How Will It Affect the Housing Market?
In general, low interest rates mean that more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to rise. On the other hand, if the interest rates increases, consumers tend to have less money to spend. With less spending, the economy slows and inflation decreases.
At low interest rates, the price of a loan is cheaper. When loans are cheap, people are encouraged to borrow, and first thing they will spend it on is on housing, thus creating a higher demand on housing. As interest rates increases, there is less people that can afford to buy a home, thus the demand decreases.
If the Fed starts reducing its bond-buying program, the interest rates will increase that may result to fewer home buyers that can afford to buy a home.
Interest rates are going higher in a consistent way, if you are looking to buy anything that requires a loan, NOW is the time while interest rates are low. Let me know if you have any questions, I will be glad to help.
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