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Realities of Real Estate: Fed’s artificial sweetening can only do so much

The numbers aren’t in yet, but word on the street is that home sales took a bit of a breather in August. As we wrote in a recent column, July and especially August is typically a slow time for real estate. People are hitting the beach, and the idea of house hunting is on the back burner. Agents also take a vacation from time to time, so they aren’t out there beating the bushes for buyers and sellers. In fact, the only period of the year that’s slower than August is the holiday time from Thanksgiving to New Year’s.

This August was especially hard hit due to a sudden rise in mortgage rates. Along with prevailing prices, interest rates are the fuel that drives the housing industry. For a long time now, home buyers have been lulled into the false notion that 30-year mortgages for less than 4 percent would be the norm. Then, Federal Reserve Chairman Ben Bernanke started talking about cutting back on quantitative easing, and everything changed.

Quantitative easing is a technique by which the Fed injects money into the economy in hopes of generating growth and a continued recovery from the recession. This Fed action has the net result of keeping mortgage rates artificially low. As a result, the mere talk of backing off on quantitative easing would predictably cause interest rates to rise, and that’s exactly what happened.

In about a month, mortgage rates shot up a full percentage point from 3.5 to 4.5. That, combined with the slow time of year, was more than enough excuse for buyers to hit the sidelines. Historically, 4.5 percent is an incredibly low rate for a 30-year mortgage. But mortgage rates are like the price of gasoline; people are very sensitive to even minor changes. To some extent, the reaction isn’t entirely rational. For example, the average driver will use about 500 gallons of gas per year, meaning that a 25-cent increase at the pump would only cost an additional $125 over the course of an entire year. Nevertheless, many would see a 25-cent increase as a major price swing, and they’d contemplate canceling the family road trip.

The same is true with mortgages. A 0.5-percent rise in mortgage rates will cost the average home owner about $100 in the monthly mortgage payment, roughly the same amount they’ll spend at Starbucks getting the daily latte. Even so, people are wondering if mortgage rates will continue to rise (as of Sep. 5, the average 30-year fixed rate stood at 4.57 percent) or will they once again fall back under 4.0.

Barring any unforeseen event, like war in the Middle East or some kind of terrorist attack, there is a series of interrelated economic conditions that should chart the future course for mortgage rates and, subsequently, continued recovery for the housing market.

The first step is to determine how we currently assess the state of our economy. Right now, the health of our economy is measured by employment levels. At other times, predominant concerns for the economy might have been inflation or the trade deficit, but right now, it’s all about jobs. On Sept. 6, the most recent jobs report showed the unemployment rate fell from 7.4 to 7.3 percent, but the reason for that decline was that large numbers of people just gave up looking for work. The labor force participation rate (the percentage of Americans actively seeking employment) dropped to its lowest rate in the past 35 years.

A good bit of this is due to changing demographics (baby boomers retiring); however, a significant cause is that the economy still stinks. The number of new jobs added in August was below expectations at 169,000, and the July report was revised downward from 162,000 to 104,000. That’s not even enough jobs to keep pace with an expanding population, let alone enough employment to spark a solid economic recovery.

Even though the jobs report was bad, the stock market’s first reaction was to go up. Here’s why: If the economy is still weak, the Federal Reserve is likely to continue quantitative easing. The stock market likes quantitative easing, because it pumps money into the economy, which in turn is invested in the stock market, causing stock prices to rise. At the same time, quantitative easing by the Fed (the buying of mortgage-backed securities) will help moderate the mortgage rate increases generated by a growing demand for housing.

So, in a nutshell, the most recent jobs report should inspire the money changers to keep mortgage rates low. Whether they’ll dip back under 4.0 is anyone’s guess. But, at least for the meantime, we might see rates drop a bit, and that would help bring us out of the summer doldrums.

Although the logic of this seems pretty solid, we have a couple of disclaimers. First, unforeseen circumstances can have a dramatic effect on where we go from here. Second, politicians always find a way to muck up the laws of economics. So, despite the best of intentions, they might also derail a better tomorrow. And, finally, our crystal ball gazing is far from a sure thing. If we could accurately predict the future, we’d be sunning ourselves on a yacht in Bermuda instead of writing columns and selling real estate.

Regardless, our call for now is that the recent rise in rates has run its course, setting the market up for a fairly decent fall selling season. But beware, all good things must come to an end, and so will quantitative easing. So, further down the road, mortgage rates will ultimately go up.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is