fed lays out plan to Taper buying mortgages

Fed Lays Out Plan to Taper

It began as a decent week for mortgage rates. Ahead of Wednesday's highly anticipated Fed meeting, mortgage rates were a little lower on a week-over-week basis, as reflected in the weekly survey from Freddie Mac. Investors, however, pushed rates significantly higher after the Fed statement and press conference.

The Fed's massive bond buying program has greatly increased the demand for mortgage-backed securities (MBS). Since mortgage rates are mostly determined by MBS prices, the added demand for MBS has been a major factor in the decline in mortgage rates to historically low levels. Wednesday's Fed statement and follow-up comments from Bernanke provided the clearest signal yet that the extra demand from the Fed will soon begin to shrink. The Fed's forecast for economic growth and the level of unemployment have improved. The statement noted that the downside risks to the economy have diminished. Bernanke even went so far as to say that if interest rates increase "for the right reasons" it is a "good thing." Any investors who had been hoping for signs that the Fed would not soon slow its bond buying program were very disappointed. Instead, the Fed signaled that if their economic forecasts are accurate, then the tapering of bond purchases will begin later this year and conclude in the middle of next year.

One of the main sources of strength in the economy which has helped convince the Fed that it's nearly time to taper is the housing market, and the data released this week continued to show improvement. May Existing Home Sales increased 4% to the highest level since November 2009 (when the home buyer tax credit was about to expire). Total housing inventory of existing homes available for sale rose 3%. May Housing Starts increased 7% from April. Single family Building Permits rose to the highest level since May 2008. The June NAHB Homebuilder confidence index posted a large increase to the highest level since April 2006.