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Realities of Real Estate: Right said Fed

Over the past couple of columns, we’ve been reviewing the impact of rising mortgage rates, as well as the impetus for those rate increases. We recently explained how the Federal Reserve, led by Chairman Ben Bernanke, triggered a jump in mortgage rates by suggesting that the Feds might begin to tighten up on their easy money policies. We then examined the impact of these sudden mortgage rate increases on home sales. Predictably, the rosy path of recovery in the housing market came to a dead end. By August, a sales volume pace of 20 percent growth in April and May dwindled to a rate of less than 4 percent. In some areas, August showed no growth at all in the number of homes sold.

In addition to slowing the number of homes sold, mortgage rate increases also contributed to a reversal in price appreciation. As of January 2013, the average price of a home sold in Anne Arundel County was $315,991. By July, the average price had grown 21 percent to $381,960. But in August, higher mortgage rates began to push prices down, with the average falling almost 4 percent month over month to $367,111.

The same effect was seen in other Maryland counties. In Howard, the average sales price went from $379,165 in January to $452,364 in July, before falling to $435,757 in August. Even Montgomery County, which is fairly resistant to economic weakness due to an ever-expanding federal government, saw prices pull back a bit. In January, the average sales price for a home in that county was $451,677. It surged to $541,667 by June, only to record two consecutive months of declines, falling to $516,678 by August. Rising rates were clearly causing buyers to cut back on what they were willing to spend.

All of this was set in motion by nothing more that Bernanke’s suggestion that it might be time for the Federal Reserve to ease off on (or “taper,” in Fed speak) quantitative easing. To review, quantitative easing is a process by which the Federal Reserve buys bonds to help keep interest rates low and encourage economic growth.

Currently, the Fed is buying about $85 billion a month in bonds, and the prevailing expectation was that it would reduce those purchases by $5 billion to $15 billion a month. But last Wednesday, on the heels of a weak jobs report and a faltering housing market, Bernanke reversed course and decided that the economy was still too weak to withstand even a small cutback in the Fed’s quantitative easing program. The Fed’s decision to maintain its level of quantitative easing was a bit of a surprise, and it sent stocks soaring to record highs.

For the housing market, the news was also well-received. According to The Wall Street Journal, “There’s been concern that rising rates have taken an unexpectedly large toll on the housing market’s rebound, and when announcing its no-taper decision on Wednesday, the Fed cited higher rates, among other factors. Mortgage rates have increased more than 1 percentage point since early May on speculation about the Fed tapering its asset purchases, and recent housing data have pointed to a slower rebound.” Major homebuilders such as PulteGroup, D.R.Horton and Lennar saw their stocks rise 4 percent to 5 percent on the Fed’s news.

It’s still a little early to see exactly how much the Fed announcement will affect mortgage rates, but there’s little doubt that we’ll see rates go down. After spending the first half of 2013 at about 3.5, and in anticipation of Fed tightening, Freddie Mac reported that the average for a 30-year fixed rate mortgage had peaked at 4.57 on Sept. 15. Immediately after the Fed’s decision to maintain its easy money policy, Federal Housing Authority mortgage rates dropped sharply to 4.25.

We expect that rate may go lower yet, and like we said in our last column, if mortgages get back into the 3’s, homebuyers might rush back into the market, hoping not to miss the boat for a second time on historically rock-bottom rates. Nevertheless, don’t get sucked into the fool’s game of trying to time the bottom on mortgage rates. If you find a house that you like, buy it! The difference between your mortgage payment at 4.25 and something under 4 is about $60 per month on the average house, an amount that’s clearly not worth missing out on a house that’s just what you want.

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