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Fed Causes Uncertainty and Increased Rates in Housing Industry

Man concerned house
Forecasts that the Federal Reserve Bank of New York (Fed) will taper their asset purchases caused a steady increase of mortgage interest rates across the board.

All three mortgage interest rates increased by at least 0.1 percentage points for the week ending June 20, 2013.

The 30-year fixed-rate mortgage (FRM) averaged 4.02 percent, a significant increase from 3.87 percent reported last week.

The 15-year FRM averaged 3.11 percent. Last week that rate was 2.97 percent.

The 5/1 adjustable-rate mortgage (ARM) interest rate averaged 2.68 percent, a large shift upwards from last week’s rate of 2.53 percent.

Greg Cook, first time home buyer specialist for Platinum Home Mortgage, said the weekly mortgage interest rate increase is a reflection of the market’s uncertainty about what direction the Fed will take with quantitative easing (QE).

Yesterday, Fed Chief Ben Bernanke held a press conference stating that the agency is expected to decrease their asset purchases beginning in late 2013 or the middle of 2014. Bernanke said this will only occur if the economy acts according to the Fed’s moderately optimistic forecast.

Cook said the QE by the Fed has supported the housing market and driven mortgage interest rates down.

“The promise they will reduce their monthly purchases of mortgages has mortgage bond investors nervous,” he said. “Without a private sector alternative on the horizon to ease the minds of the investors, rates will continue to climb toward more normal levels.”

Howard Reback, senior vice president for Bailes & Associates, a commercial real estate firm, questioned Bernanke’s motivation for the press conference. He said that Bernanke can retract everything stated. Since the predictions are for late 2013 or early 2014, the speech was more of a “test.”

“If there is a strong negative reaction then he will possibly change his course of action,” Reback said. “He may push it out even further.”

If the Fed does proceed as forecasted, Reback said mortgage interest rates will increase because there will be “less fluidity in the secondary market.”

Moving past the Fed’s actions, Cook said that due to a peak in the current buying season, demand is high and inventory remains scarce. This should continue to force housing prices upwards.

The only warning Cook provides is when institutional investors state that “enough is enough” and sell the multitudes of homes they have acquired in an attempt to cash in on their investments.