As the Federal Reserve seeks to curb high levels of inflation, the next move is set to have a significant impact on the mortgage market. And the ability of many people to buy a home can hang in balance.
The Federal Reserve Board warned on Wednesday that it was ready to taper off the bond purchase program being implemented throughout the COVID-19 pandemic to boost the country’s economy. In a post-central bank meeting speech, Federal Reserve Board Chair Jerome Powell said banks could “move easily” to curtail these purchases when they meet again in November. rice field.
In addition, the Fed has suggested that interest rates could be raised faster than expected in 2022.
“The forward guidance was pretty close to the clearest thing we could really expect,” Amherst Pierpont’s Chief Economist Stephen Stanley wrote in a research note analyzing the Fed’s statement.
As part of the stimulus package, the Fed purchased $ 40 billion worth of mortgage-backed securities each month. These purchases provided a great deal of liquidity to the mortgage industry and allowed lenders to reduce interest rates to historically low levels.
“The Fed’s goal was to keep the housing finance environment liquid,” said George Ratiu, Economic Research Manager at Realtor.com. “I think it has fully achieved that goal.”
However, reducing its bond-buying activity can have a significant impact on the mortgage industry and the housing market.
Where are mortgage rates going now?
Mortgage rates have basically held up as investors have been waiting for clearer signs of economic trajectory for the past two months. Mortgage rates have been below 3% since July, but mortgages have been below that threshold for most of the year.
As of September 23, according to Freddie Mac, the average 30-year fixed-rate mortgage was 2.88% and the average 15-year fixed-rate mortgage was 2.15%.
The average interest rate on a five-year Treasury-indexed hybrid adjustable rate mortgage was 2.43%. Matthew Speakman, senior economist at Zillow, said:
“The modest reaction from interest rates suggests that investors were expecting news, and the announcement was in line with their expectations.”
However, this may change in the coming weeks. “The moment the Fed begins to pull back, they will have an immediate effect,” Latiu said. But even before the Fed takes action to curtail mortgage bond buying efforts, mortgage rates can rise.
Mortgage rates have historically followed the direction of long-term bond yields, including 10-year government bonds.
Relations between the two have weakened throughout the coronavirus crisis, but probably reflect how influential the Fed’s asset purchases were. Long-term bond yields rose in response to the Fed’s statement as investors began pricing policy shifts.
“”“This news may raise mortgage rates a bit, but it’s more likely to get a hop than a leap.”“
And as long as the economic recovery is stable, bonds are considered a safe haven, reducing investors’ desire for bonds. As a result, the price will increase.
“The news may raise mortgage rates a bit, but it’s more likely to get hops than a leap, and it may be short-term,” said a mortgage writer on the personal finance website Nerd Wallet. One Kate Wood said.
“The Fed’s announcement just says it’s trying to do what we already knew what they were trying to do,” she added. “They haven’t scheduled a gradual taper of asset purchases. They simply said they would do so when they felt the time had come.”
But how high can interest rates be when the Fed takes action? “It’s unlikely that interest rates will jump to 5% soon,” Latiu said. This is because investors’ demand for mortgage-backed securities remains strong and interest rates are capped. He predicts that mortgage rates will approach 3.5% by early 2022 and could approach 4% by the end of next year.
“The era of mortgage rates below 3% may already be late by the end of the year,” said Ratiu.
How Higher Mortgage Interest Rates Affect the Housing Market
Rising mortgage rates will almost certainly cause lower refinancing demand, but the impact on homebuyers and the home market may not be so obvious.
“Rising interest rates can weaken housing demand, but it’s hard to distinguish between buyers who are discouraged by rising interest rates and those who give up searching for homes because of rising home prices and inventory shortages. Maybe. “
House prices aren’t at a rapid pace earlier this year, but they’re still rising. Homes for sale are still very low in stock, and homebuilders continue to address supply and labor shortages that extend the timeline for new home construction.
“”“Mortgage payments can rise significantly as part of your income.”“
So while the heated housing market may only be hot these days, rising mortgage rates can still create significant affordable challenges for buyers.
“If prices stay at the same level and stay flat, mortgage payments are likely to rise significantly as part of their income,” Latiu said.
Another concern is credit availability. Many lenders have opted to impose stricter credit and income requirements on future mortgage borrowers so as not to take undue risk in the event of a COVID-19 crisis. “This has eased somewhat, but given that lenders are hesitant throughout 2020, despite support for the Fed’s policies, how much changes to the Fed’s asset purchases will affect lenders’ strategies. It’s unclear if it will affect it, “Wood said.
Counterpoint: How Tapering Helps
Most economists argue that rolling back the Fed’s asset purchases will raise interest rates, but some argue that it can actually be counterproductive.
Inflation remains a major boogieman for investors, and if the Fed curbs it, it will have a positive spillover effect.
Greg McBride, chief financial analyst at Bankrate.com, said: “The longer the Fed maintains its current asset purchase pace, the greater the risk that inflation will continue to rise, so the start of the taper is mortgage rates. It’s not just about damaging. ” “With the first rate hike scheduled for 2022, the Fed could ultimately give investors some confidence in buying long-term government bonds and mortgages to respond to rising inflation. there is.”
In addition, wage growth could catch up with or even outweigh the rise in mortgage rates, Latiu said. This may counter some of the challenges posed by rising home prices and make it easier for some households to qualify for a mortgage.
“The era of mortgage rates below 3% may be behind us”: Fed policy shifts can have a significant impact on homebuyers
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