The Fed indicates a reduction in its quantitative easing program
While mortgage interest rates have repeatedly hit new lows over the past few years helping to spur a recovery in the housing sector, recent comments by Federal Reserve Chairman Bernanke could signal that those days are coming to an end.
On June 19, Bernanke indicated that, under a “moderately optimistic forecast,” the Fed could begin to “taper” its monthly purchases of mortgage-backed securities as early as the end of 2013, phasing out the program by late 2014.
Bernanke’s mere suggestion that central bankers, under the right conditions, might by the end of the year slow the pace of their program to drive interest rates lower and boost the economy through bond purchases, commonly known as “quantitative easing,” was enough to drive stock and bond markets sharply lower.
Despite a rise in interest rates, Bernanke is optimistic about housing market
As for what this means for the housing market in particular, however, the general consensus seems to be that, to the extent the Federal Reserve becomes less of a player in the bond market, there will be less artificial demand, which will in turn drive up mortgage interest rates and put pressure on the housing market. Nonetheless, Bernanke appeared optimistic about the housing market, even in spite of a recent rise in interest rates, and said that the expectation of rising home prices could compensate for slightly higher mortgage rates.
Despite the general feeling that higher interest rates hurt the housing recovery, Bernanke’s optimism may have some support. There are several reasons why slowly rising mortgage rates might not dampen the housing recovery.
First, to the extent that potential home buyers have been sitting on the sidelines, the prospect of increasing mortgage rates may actually incentivize them to buy now rather than risk paying higher interest rates later.
Second, other factors play a more significant role in home prices, including the general health of the economy and job market. So to the extent that the economy continues to recover and unemployment continues to drop, people may be more willing able to buy.
Third, much of the recent rise in home sales have been driven by investors and cash buyers looking for a good deal. These buyers are not likely to be affected by slightly higher interest rates.
And finally, interest rates, even if they rise by a point or two, will still be low by historical standards. And past housing recoveries have taken place in an environment of higher interest rates.
Thus, while Bernanke’s comments and the prospect of increasing mortgage rates rightly cause some concern for the housing recovery, it is eminently foreseeable that the housing market continues on a growth trajectory, at least for the next several years.