If anyone is thinking of buying property this year, they should consider doing it sooner rather than later. The Fed is beginning to take the foot off the bond pedal by buying fewer and fewer mortgage bonds, allowing for mortgage rates to rise. They started in December when they reduced their purchases from $85 billion to $75 billion in mortgage and treasury bonds per month,” he writes, “and they’re telling us that they are going to continue to ‘taper’ their purchases every six weeks until they are buying $0 in bonds.
What does this mean to a consumer? You will be paying more in interest as we get further and further into 2014. The big test for the Fed was when they did their first reduction in December. No one really knew how the market would react, and it actually did not go off that badly. Mortgage rate rose approximately .125 percent and the stock market did not crash or correct as many were thinking was going to be the case.
What this tells me is that the Fed, unless blindsided by some bad economic news, will continue to let mortgage rate and treasury rates rise, which will bring a 30 year fixed from January’s 4.500 percent to an estimated 5.5 to 5.75 percent range by the end of the 2014, if they in fact are out of the market completely. The Fed has told us that they will keep short-term rates — a variable rate that is used in home equity loans and what the prime is tied to — low for a considerable amount of time even after tapering if over. The Fed Funds Rate does not directly affect mortgage rates.
What could alter the Feds course? Bad economic news could make them blink. January’s job unemployment report showed the unemployment rate at 6.7 percent, which was lower than the 7 percent reported in December, but that was largely due to a reduction in the workforce. Most economists where expecting approximately 200,000 jobs created for December and there where only 74,000, a big reduction from what they were hoping for. Is this the start of a trend or merely a blip on the radar screen?
The other concern for the Fed is if inflation remains below their current target level. In that scenario, if the Fed were to let rates rise too quickly, it could cause even less inflation or possibly even deflation, which would be very, very bad for the economy, because prices of goods could start to plummet out of control.
Will the spring and summer real estate be a boom or a bust? My guess is that buyers will want to get in before rates go up, providing some support for the real estate market, which should give the Fed some confidence that things are going in the direction that they want.
If you buy now and rates go down later, you could always refinance, but I do not think that is going to happen.
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