Housing Rebound Supports Confidence

Many have questioned the rationale behind the Federal Reserve’s latest open-ended quantitative easing program focused on purchasing mortgage-backed securities. Based on recent statistics regarding home prices, their tactics to keep borrowing rates low appear to be having a positive effect. According to J.P. Morgan, the number of underwater borrowers, or those that owe more on their mortgage than their home is worth, declined by 4 million last year to 7 million. Should prices continue to rise at current rates, that number could fall to 4 million in 2 years. Rising home prices have a positive effect on overall household wealth and consumer confidence, and may provide a backdrop for increased consumer spending. We believe the biggest question moving forward is whether these price gains can be sustained if mortgage rates rise from today’s historic lows. Based on the Fed’s actions, it appears they think the answer is no, which tells us that as long as inflation is in check, it is likely their purchasing programs will remain in place.