May 15, 2013, 11:15 a.m. EDT
Will ending Fed stimulus hurt housing?
How higher mortgage rates could chill real estate’s rebound
The Federal Reserve needs to tread carefully when it winds down
its $85-billion-a-month bond-buying program, experts say, to avoid trampling the
green shoots of the country’s fragile housing market.
Is the economy ready for an end to the stimulus?
Jon Hilsenrath explains the thinking behind the Federal Reserve's plan to wind down its economic stimulus program, and how the issue is likely to be tackled by chairman Ben Bernanke's successor. Photo: GettyNo matter how the Federal Reserve reduces its bond-buying program, it’s likely to have an impact on housing, analysts say. “If it just pulls out, it will be a catastrophe,” Grant says. Current policy favors borrowers, he says, while penalizing those who save and invest.
A gradual withdrawal of Federal Reserve funds will also throw a spanner in the current refinancing boom, others say. Historically low mortgage rates — 3.5% for a 30-year fixed rate versus 6.1% in 2008 before the Fed began buying back mortgage-backed securities — have led to a strong increase in refinancing in recent years with some homeowners refinancing more than once to lock in lower monthly mortgage repayments. “If the Fed cuts back on actions that have kept mortgage rates low, the main effect of higher rates would be a drop in refinancing activity,” says Jed Kolko, chief economist at real estate listing site Trulia.
Bigger homes will be most likely to feel the impact of higher rates, economists say, as more would-be home buyers feel less confident about moving up the property ladder. “Higher rates would mean that homebuyers would not be able to afford as expensive homes,” Kolko says. That’s bad news for those who are waiting to sell, he says, “as it would probably cause home prices to rise more slowly than they have been.” On the upside, Kolko says it will help prevent another bubble. Prices of existing homes soared 10.5% in March year-over-year, according to the latest figures from CoreLogic, a mortgage-data firm, representing the biggest year-over-year increase since March 2006.
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The Fed needs to remove itself slowly. If capital is kept artificially low
fow too long, which is a point we have either reached recently or will soon,
then too much of the asset base will get allocated toward housing. Housing is
not a productive asset and certainly should never have been turned into a
financial tool. The real fear now is all the hedge funds investing in
residential housing with no concern for the local communities. Speculation
again, only this time on steroids and it needs to be halted.
“Higher rates would mean that homebuyers would not be able to afford as
expensive homes,” Kolko says. That’s bad news for those who are waiting to sell,
he says, “as it would probably cause home prices to rise more
slowly than they have been.”
How about more like the prices will FALL.
How about more like the prices will FALL.
I don't think the Fed can stop the so-called stimulus. They are in too deep
, they own too much of that debt and every move they make affects the whole
market. We will have plans and talk from them, but they will never, ever find
the right moment to implement any of it.
If folks believe interest rates are going to rise quickly as the rush for
refinancing will peak then collapse, then as the interest rates spike housing
sales will also peak and collapse.
OMG. Will ending FED stimulus end life on earth as we know it? Does anyone
grasp the monumental absurdity of this.
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