Here's a great description on the above explanation from my friend TOMMCGIVERON.com:
"The government purchasing of mortgage backed securities is nearing an end. To quote, Steve Harney, national residential real estate expert, â€œWhen the banks have to lend their own money to people on a 30 year loan, theyâ€™re not going to be satisfied with 5%â€¦â€
If youâ€™re frequented my website, you know that I pay close attention to whatâ€™s happening in the real estate market. I do this so I can be a strong source of valid and useful information for my clients and my readers. What Iâ€™m going to cover in this article is going to be like smelling salts that wake you up from a daze.
The Fed will gradually slow the pace of the purchasing mortgage-backed securities (MBS) in anticipation of a full execution of the program to keep the mortgage interest rate low by the end of March, 2010.
It marks an extension of the MBS-purchasing program past the previously anticipated year-end date of December 2009. The slowing of purchases is intended to â€œpromote a smooth transition in marketsâ€ as the government ends its participation in the agency MBS market. Basically, the government is going to stop buying mortgage securities in March, 2010.
To implement the gradual slowing of agency MBS purchases, agents acting on behalf of the Federal Reserve Bank of New Yorkâ€™s open market trading desk plan to reduce the average weekly purchase amounts beginning with the reporting week that starts September 24, according to a NY Fed statement.
Will the real estate market be strong enough to withstand this slowdown? Are banks and their investors, willing to invest money into such an unsteady market area, such as the current real estate market? This is the big questionâ€¦is the party [of low interest rates] coming to an end?
With the largest purchaser of MBS, not buying up these assets (helping turn money over quickly for banks and their investors), will banks be apt to continue writing mortgages at 5%?
The answer is no.
So rates will go up after March, 2010.
Question is, how high and will buyers continue coming out to buy? I would say the answer to buyers still buying is a big fat YES [they just canâ€™t pass up the fact that prices are down 35% from peak]. Additionally, as mortgage interest rates go up, prices must drop [hear that sellers?]."