After the much anticipated announcement of the Federal Reserve’s decision and lots of market speculation that tapering would finally begin, Bernanke announced the continuation of its easy money policies (QE). The markets had already baked in the expectation of tapering along with several traders making bets on the Fed’s play, only they found out the punch bowl was still flowing and wouldn’t be taken away in the near term. Bernanke hasn’t yet seen the recovery in the economic data that he has been watching for.
Existing home sales reported a 6-1/2 year high in August showing strength in the housing market and strong demand. According to The National Association of Realtors (NAR), existing home sales increased 1.7 percent last month which was more than economists expected. This increase puts sales at an annual rate of 5.48 million units. Much of this recent rush to buy can be attributed to the expectation of rising mortgage rates and the increases in home prices. Homebuyers want in on the action before interest rates and home prices over heat. Bernanke’s latest announcement, however, should help to ease the 30-year fixed mortgage rate until the next Fed meeting.
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he median home sales price last month rose to $212,100; a 14.7 percent year-over-year jump. Although inventories are still tight and as a result, prices continue to inch upward, homebuyers can still lock in a historically low mortgage rate giving them more purchasing power. While this scenario seems great for prospective homebuyers, at some point the punch will run out and the party will end. “Clearly the Fed has been spooked by the extent of the surge in long-term interest rates over the past couple of months and the impact that now appears to be having on the housing market. But there is a dangerous circularity here because the initial rise in long-term rates was largely a response to the Fed hinting that it would begin to reduce its asset purchases sometime in the second half of the year,” Paul Ashworth at Capital Economics commented.
Mortgage rates fell after the Fed made its announcement. They are still above the low of 3.35 percent seen in May but with the Fed continuing to print money, mortgage interest rates could stay around this range for a while longer, giving those who haven’t purchased yet, the opportunity to get in the game. If interest rates withdrawal to the lower rates seen earlier in the year, it’s quite possible that more mortgage refinancing would occur.
It will be interesting to see what the next few months of housing data bring from this recent news announcement. The housing market should experience some more positive gains if all plays out like the Fed has planned. Growth and demand can remain strong with low interest rates and this gives homebuyers time to still purchase as rates rescind, but the underlying cost of artificially inflating the housing market remains to be determined.
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