|“Listen to what the man said.” The title of Paul McCartney’s hit song also applied to Fed Chairman Ben Bernanke last week, as the Fed made an important decision that impacted the markets and home loan rates. Read on for details.
Last Wednesday, the Fed unexpectedly delayed tapering of its Bond purchase program (known as Quantitative Easing) as Bernanke said that the economy still isn’t strong enough to begin easing back its purchases. Remember that the goal of these purchases has been to stimulate the economy and housing market. In his press conference, Bernanke said that tapering could come towards the end of the year, but for now the Fed will continue to purchase $45 billion per month in Treasuries and $40 billion in Mortgage Bonds.
After the news, Stocks had a record trading day while Mortgage Bonds had theirbiggest one-day rally since August 2011. This is significant because home loan rates are tied to Mortgage Bonds, so the Fed announcement helped home loan rates as well.
In other news, the Consumer Price Index for August came in below expectations and was lower than the July reading, showing that inflation at the consumer level still remains tame. The year-over-year CPI reading fell to 1.5 percent, led lower by a decline in energy prices, and remains below the Fed’s upper target range of 2 percent.
In housing news, Housing Starts rose by 0.9 percent from July to August whileBuilding Permits fell by 3.8 percent. However, there was a big surge in permits for single-family dwellings, pointing towards a sustained strengthening in the housing recovery. Existing Home Sales also came in above expectations, reaching an annual rate of 5.48 million units in August, a six-year high.
What does this mean for home loan rates? Economic data in the coming weeks and months will be a key factor in whether the Fed begins tapering its Bond purchases later in the year or in 2014. This timing could pay a big role in the direction Bonds and home loan rates move in the months ahead.
The bottom line is that now remains a great time to consider a home purchase or refinance, as home loan rates remain attractive compared to historical levels.
|Forecast for the Week|
|Another full week of economic reports is ahead, with news on inflation, housing, Consumer Confidence and more.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.
When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse.
To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.
As you can see in the chart below, the Fed’s decision not to taper its Bond purchases led to a huge rally. I’ll be watching closely to see if Bonds and home loan rates can hold on to these improvements.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday Sep 20, 2013)