Happy New Year!!
The Fed taper is officially happening. Starting in January, the Fed will cut back its bond buying by $10B per month. This is good news in general, in that it means the Fed sees the economy strengthening to the point where it can start to pull back the artificial support it is providing. In the latter half of 2013, just on the speculation that this taper was coming, mortgage rates went up around 1.00%. What will happen now that it is officially here?
While the Fed is merely reducing its $85B in bond purchases to $75B and still providing a great deal of stimulus to prop up the economy, it is expected that rate volatility will be higher in 2014. A recent AP article states “Homebuyers aren’t going to be happy,” says Ellen Haberle, an economist at the online real-estate brokerage Redfin. “In the weeks ahead, mortgage rates are likely to reach or exceed 5 percent.” However, one good thing is that if the economy is truly recovering and improving, then consumer jobs and income levels should also improve to bring new homebuyers into the market.
Another important factor is the stock market which is at all-time high levels right now. The Fed included language in its taper announcement to help ease the market’s fears. It stated it will keep the Fed Funds rate where it is now between 0% and 0.25% for the foreseeable future and not increase it until unemployment drops below 6.50%. Normally what is seen when bond prices rise is that the market declines. However, with the Fed’s statement, bond prices rose, and the market also increased.
Many are now expecting a market correction as the recent large gains are based on an economy that is reported to be improving, but is currently falsely supported by the artificial low interest rate environment created by the Fed. Many economists are predicting a substantial stock market correction in 2014, and if this happens, investors may flock back to the safety of bonds, which would in turn have the impact of lowering rates.
Another important factor to watch that may have a larger influence over where mortgage rates and lending take shape in 2014 is related to the loan programs themselves. Fannie Mae and Freddie Mac which control 2/3 of the mortgage market recently announced they would be increasing overall guarantee fees as well as raising loan-level guarantee fees to lenders where the borrowers have good, but not the best credit. Experts predicted this would increase mortgage rates from 0.25% to 0.40%.
The good news in this is that the incoming regulator for these two agencies, U.S. Representative Mel Watt, has delayed the increases to allow time to study the impact of the increased pricing.
So where are rates headed in 2014? While no one knows for sure, all indicators seem to point towards a long term continued higher rate trend. They cannot stay at these low levels forever. I would predict a 0.50% to 1.00% increase over the course of the year with a lot of volatility in between.
It may be years from now, but the day will eventually arrive sooner or later, when the Fed is not artificially controlling interest rates to keep them low and the focus is on fighting inflation. We all know raising rates is one of the Feds favorite tools to fend off inflationary pressure. Those who have purchased houses and obtained long term low rate financing at today’s rates will be pleased to know they did so at the right time. If you are in the market to buy a new residence, 2nd home, vacation home or investment property there is no better time than now to get pre-qualified, contact your Realtor and start shopping.