Yesterday, many declared “victory” when the Fed decided not to taper its monthly purchases of mortgage-backed securities and longer-term Treasuries.
Put simply, most assumed the Fed would announce some level of tapering, such as reducing their $40 billion in monthly MBS purchases by $10 billion, just to test the waters.
Instead, they decided to keep on keeping on, which excited the markets and caused the 10-year yield to plummet about 20 basis points yesterday late in the day.
As a result, mortgage rates should head lower as well, though as I’ve mentioned before, interest rate movement always tends to lag news, assuming it’s good news.
It’s kind of like gas prices. You read about oil prices dropping, and expect to save some coin at the pump, only to see gas station operators taking their sweet time to actually bring prices down.
By the time they finally get around to lowering prices, some piece of bad news comes along and they quickly raise prices again.
Now this isn’t to say that mortgage rates won’t improve somewhat, but they’re not going to fall dramatically. Lenders don’t want to get burned when there’s still a lot of uncertainty in the air, so interest rate improvements should be conservative and calculated.
Long story short, the tapering or outright end to the Fed’s purchase program is already baked into rates, as evidenced by the 1%+ climb seen over the past several months.
This will not come undone simply because the Fed decided to delay its tapering. It might lead to a temporary pullback, but not much more because everyone knows the party has to come to an end eventually.
Should We Let the Housing Market Stand On Its Own Two Feet?
Again, everyone seems to be excited, especially those that stand to make money from the lower mortgage rates.
That includes real estate agents, mortgage brokers, loan officers, banks, lenders, homeowners, and so on.
However, the difference in rate shouldn’t determine someone’s decision to buy or even refinance. If you weren’t going to buy a home when the 30-year fixed was at 4.625%, you shouldn’t buy if rates drop to 4.25%.
Business boost aside, you have to wonder if are we creating an even nastier environment down the road?
Let’s say this delay (that’s all it is) leads to even more housing market euphoria, which it inevitably will.
Over time, home prices should continue to rise because buyers will be able to take on larger mortgages at lower rates.
But what happens when home prices are even higher than they are now, and the Fed really has to curtail its MBS purchases? Are they waiting for the housing market to be in full bubble mode before they pull the trigger?
Wouldn’t it be better to start easing purchases now, especially when the market already anticipated it?
Instead, the Fed seems to believe that it’s okay to continue to foster an artificially low rate environment, even as some markets enter bubble territory.
I understand their pause – they probably didn’t expect mortgage rates to jump as much as they did when they first hinted at tapering, but once everyone digested the news and pretty much accepted it, why didn’t they follow through?
Once this euphoria wanes rather abruptly, the focus will turn back to when the tapering will take place, which could lead to even higher rates before the Fed actually does anything.
There’s never a great time to end stimulus, but keeping it going after everyone expected it to stop seems like a bad plan.
In the meantime, enjoy the slightly lower mortgage rates, while they last…