The Price of Apples Just Got Cheaper

Many are wondering how yesterday’s (3/18/09) move by the Fed made rates drop the way they did. With the Fed Funds rate at 0.25%, leaving no room for a reduction, mortgage rates dropped after the meeting adjourned. It was the announcement that the Fed would be “injecting” $700 Billion into the mortgage market that created this reaction.

Think of it this way…..You go to the supermarket to buy apples. There’s a shortage, for whatever reason, and the rules of supply and demand create a higher price. Some time later, there’s a new supply of apples that has come in and the supermarket has more than they can handle. In an effort to get rid of them, the price drops, drastically. That’s basically what happened in the mortgage market. The local farmer (The Fed) has just delivered truckloads of apples (assets into the Mortgage Backed Securities market) and the surplus has reduced the price of apples (mortgage rates).

So, if you’re in the market to purchase a home, or you’re a realtor with a borrower who’s been on the fence, NOW, is the time to make your move. Prices are low, there’s an $8000 tax credit for first time home buyers, and this little gift from the Federal Reserve.