The long awaited Fed announcement came yesterday to little fanfare, perhaps because market pundits were fretting about a taper for so long that the actual event was lackluster.
The Federal Reserve announced yesterday that it would taper its purchases of agency mortgage-backed securities beginning in January.
Instead of buying $40 billion in agency MBS each month, the Fed will buy $35 billion. They will also reduce their monthly purchases of longer-term Treasury securities from $45 billion to $40 billion.
In other words, they’ll be pledging $75 billion a month in monetary accommodation instead of $85 billion, with further cuts expected as time goes on.
They chose to take action because the economy seems to be getting back on track, with labor market conditions improving the unemployment beginning to decline.
Of course, we’re still not out of the woods, which explains the very modest reduction in Fed purchases.
Further, the Fed noted that its “sizable and still-increasing holdings” of mortgage securities and Treasuries should keep downward pressure on home loan interest rates.
How Did Mortgage Rates React to the Taper News?
At first glance, mortgage rates did rise a bit, but not by much. Instead of a rate of 4.625% on a 30-year fixed mortgage, that rate might be 4.75% instead.
Or the fees for the same rate might be a little bit higher. In reality, the taper won’t make or break any mortgage applications.
When it comes down to it, this taper was a long time coming, so the pricing is already factored in mostly.
After all, mortgage rates had already climbed more than 1% from their record lows reached about a year ago, so the damage was already done.
Another thing to consider is that mortgage origination volume is down considerably from recent levels.
When mortgage rates were hovering near all-time lows, refinance activity was humming. But since then it has fallen substantially.
Just take the latest mortgage application report from the Mortgage Bankers Association, which noted that weekly mortgage apps fell to their lowest point in more than 12 years last week.
Both purchases and refinance applications have taken a hit thanks to the higher mortgage rates, higher home prices, lack of inventory, and seasonal conditions.
So if we do the math, far fewer loan applications and funded loans means there will be a lot less mortgage-backed securities out there.
With the Fed still pledging to purchase $35 billion a month, they could in fact wind up buying a larger share of a smaller pool, thereby keeping even more downward pressure on mortgage rates than before the taper.
All that said it might not be much of an event, aside from the next few days as everyone panics slightly about the news and uncertainty.
Instead, perhaps mortgage rate movement will be dictated by the fundamentals again, like the state of the economy.
Unfortunately, as more good economic news comes down the pipe, mortgage rates will likely rise, which is the way it has always been and should be.
There are also the new credit score adjustments to worry about for conforming mortgages, which could easily outweigh the effects of continued tapering.
70% of the Country Remained Affordable in Q3
Wondering how the recent mortgage rate increases are affecting housing affordability?
During the third quarter, the average interest rate for a 30-year fixed mortgage was 4.4%, low enough for more than 70% of the country to be deemed affordable, per Freddie Mac.
However, only 36% of the West was affordable by that measure, compared to ALL of the cheaper North Central region of the United States.
And if mortgage rates rise to 5%, only 63% of the country will be affordable, assuming home prices and income remain constant, which they probably won’t.
Assuming rates rise to 6%, roughly 55% of the nation would be affordable, and at 7%, that figure drops to 35%. Not good.
So let’s hope mortgage rates stay low for a lot longer, or else we’ve got a problem. Again.