The Federal Open Market Committee begins a two-day monetary policy meeting tomorrow (Tuesday), December 16, and markets will be looking for guidance about when the central bank will “taper” its quantitative easing stimulus program. In its third iteration of QE, the Fed has been buying $85 billion per month of U.S. Treasury bills and mortgage-backed securities, while keeping the federal funds rate near zero.
The Fed’s actions were designed to aid the U.S. economic recovery, in part by keeping credit fluid. Upon the Fed’s implementation of QE in late-2012, mortgage rates fell to record low levels, thus helping aid a refinance boom and making home purchases more affordable.
However, as the economy has improved, speculation has increased that the Fed could scale back or “taper” QE. Meetings throughout 2013 were watched carefully, but the FOMC didn’t budge. One side effect of this speculation was for investors to “prepare” for a taper by “pricing in” the eventual reduction of demand in the U.S. Treasury and mortgage-backed security markets. As this process played out, mortgage rates increased.
Earlier in the year, markets seemed pretty confident that tapering would begin by the end of 2013. This changed as the Fed noted that while the U.S. economy was advancing, it still remained relatively sluggish. Now expectation seems to be that the Fed will wait until the first quarter of 2014 to taper.
The Fed will be digesting some of the recent positive employment news. The unemployment report of November turned in much better than expected, with payrolls adding 203,000 jobs and the unemployment rate dropping to 7.0%. Jobless claims have been trending downward for awhile now (even after last week’s spike).
The Wall Street Journal asked a selection of economists if the Fed should taper in December, and the results were mixed. We saw a selection of answers, including “it is absolutely too early” to “the Fed should taper because… there are large risk of future inflation and higher future interest rates.” Several economists asked if there was evidence that QE was doing anything to help, and others speculated that the data hadn’t been consistent. Read more here.
Mortgage rates moved higher last week, and begin the week flat. See here for the rates. We will see data on housing starts, inflation, jobless claims, existing home sales, and GDP this week. And, of course, Fed Chairman Ben Bernanke will announce the Fed’s policy decision.
In other real estate market news:
– Foreclosures drop to eight-year low as crisis wanes (Bloomberg). “Foreclosure filings in the U.S. plunged last month to the lowest level in almost eight years as investor purchases and an improving economy brought the end of the housing crisis with sight.” There were 111,454 properties in November that were issued default, auction, and repossession notices. (Link)
– Mortgage rates slightly lower in latest week (Wall Street Journal). “Average mortgage rates in the U.S. fell slightly in the latest week, according to mortgage-finance company Freddie Mac, as markets looked ahead to the Federal Open Market Committee meeting next week for indications of whether the Federal Reserve will taper its bond-buying program.” (Link)
– Home equity lines of credit, and lavish renovations, return (Bloomberg Businessweek). “Spending on home renovations is hitting records as banks such as Wells Fargo (WFC) and JPMorgan Chase (JPM) increase lending for home equity lines of credit.” (Link)
– Short sale sellers need a sense of urgency (Washington Post). “The Mortgage Forgiveness Debt Relief Actof 2007 sunsets at the end of December, just two weeks from now… If the act is not renewed, the amount of the mortgage that isn’t paid back to the bank will, as of January 1, be considered income and taxed just as if it had been received in cash.” (Link)
– Trulia’s housing predictions: how 2014 will be different (Trulia). “Next year looks to be the year of the repeat home buyer, as worsening affordability discourages first timers and investors; also, the buying process will be less frenzied. Hot markets to watch are primarily in the South, Plains, and Mountain states. Rental activity will swing back toward urban apartments, away from single-family homes.” (Link)