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Tapering talk: What’s up with rates?

Monday, September 23, 2013   /   by Nathan Clark

Tapering talk: What’s up with rates?

Tapering talk: What’s up with rates?


 


If there ever was a time when mere words sent a shockwave through an industry, it was this past May, when comments from the Federal Reserve Bank sent mortgage interest rates on a quick rise.


 


The talk was of “tapering” the Fed’s bond-buying program, the $85 billion-dollar-a-month method of stimulating the economy, which help keeps interest rates down. After hints at this tapering of buybacks, mortgage rates rose by about a full point over the next couple of months.


 


After the first tapering talk, some analysts and economists expected the Fed to begin tapering this fall, perhaps as early as September. The Fed, however, put that talk to rest on Sept. 19, when it met and decided to not begin tapering the bond-buying program in 2013.


 


Almost immediately, the average rate on a 30-year, fixed-rate mortgage fell from 4.57 percent to 4.5 percent, according to government mortgage entity Freddie Mac.


 


It’s still just a matter of time before things return to “normal” enough for the Fed to stop just talking tapering and start actually tapering. For now, though, all it seems to take for rates to move is the talk.


 


It would seem that the fear of a continued rise in rates helped home sales in the short term. Sales were strong over the summer – in August, the annualized sales rate reached a six-and-a-half year high – probably boosted by buyers who wanted in before rates got too high.


 


There were long-term concerns, however, that rates would continue to rise as speculation on tapering grew, and, of course, when it actually happened. Tight inventory is already affecting affordability in some markets, and higher rates would just compound affordability concerns. So now what?


 


Well, for now, it would seem that rates will most likely stay flat. Despite the small downward dip after the Fed meeting, they are probably not going to go into some kind of free fall. An economist for the National Association of Realtors recently predicted that they will slowly continue to rise before eventually leveling off somewhere around the 5.0-percent market next year.


 


Back when the Fed’s comments first sparked the rate rise, I wrote that I was kind of surprised at the talk and doubted the idea that tapering would actually begin soon. The reason why was because the economy didn’t seem to be growing at the kind of pace that would warrant a slow-down in stimulus.


 


And that’s the delicate matter the Fed faces. The easy-money policy happening now can’t go on forever, but a too-soon-too-much pullback could send a recovering economy backwards. In fact, it would be my guess that the comments about tapering back in May were the Fed’s way of testing the waters, gauging which way the economy might go on the mere mention of slowing the bond buy-backs.


 


This sort of thing is likely to continue. The Fed is going to have to come up with a plan for this tapering. It’s going to have to be executed in a manner that doesn’t disrupt the economy. Substantially higher interest rates, for example, could be detrimental to a recovering housing industry, which is key to the overall economy. If simply talking about tapering can cause a short-term spike, what kind of havoc could a haphazard tapering wreak on housing?


 


There has also been a lot of speculation by economists that higher interest rates could severely affect the federal budget. When national debt is as high as it is right now, higher interest rates are costly. Servicing the debt means that dollars come out of the federal budget, in which case the savings made by recent cuts could be wiped out.


 


It would seem that the Fed has to realize that tapering now could be harmful. For that reason, it’s unlikely rates will rise very far very soon.


 


Truthfully, rates have been very low for a very long time. They’re going to eventually rise to more “normal” levels. At this point in the housing recovery, that could slow things down a bit, but if a bit higher rates mean more “normal,” don’t we want that?


 


Things haven’t been normal in real estate for a while. “Normal” would mean fewer foreclosures and distressed sales. “Normal” would mean fewer underwater borrowers and more people able to sell homes. “Normal” would mean less-strict lending standards and affordable down payments.


 


We’ve now seen how tapering talk can affect markets. If it eventually gets us back to “normal,” well, then talk away.

Nathan Clark & Associates
Nathan Clark Team
39 Cedar Swamp Rd
Smithfield, RI 02917
401-232-7661

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