Over the course of just the past few months, the role held by the Federal Reserve in the mortgage market has been steadily increasing. While the central bank continues to make attempts to shrink the bond-buying program it has embraced, there’s a good chance that the Fed’s role could remain quite large.
Each month, the Federal Reserve (FR) has been buying up approximately $40 billion in securities backed by mortgages as of late. In addition, the Fed has been purchasing $45 billion in treasury bonds. While things have surely been going steadily, the FR hopes to deduce its purchasing of each debt by $5 billion monthly.
A rise in interest rates
During the summer of 2013, interest rates began to skyrocket, putting an end to the boom associated with home-refinancing that had previously been going quite strong. The Fed’s increase in mortgage-bond purchases can be seen as a direct result of last summer’s tumbling bond production. In November, for example, the Fed bought up approximately 90% of eligible bonds, which is up from around two-thirds of bonds earlier in the year according to Yahoo News. While the Fed does indeed plan to begin reducing its bond purchases, it maintains that the larger role that it is playing in the mortgage market will hopefully cause the central bank to provide a sizable amount of support in the coming months.
If there’s anything to gain from the rise in interest rates in December, it’s that the U.S. economy is finally beginning to gain quite a bit of traction. Consumer confidence is on the rise, people are purchasing real estate once again and optimism about the state of the economy is perhaps higher than it has been in many years. It’s hard to find fault in an improving economy, but, as one might expect, this has raised a few questions and concerns regarding when the Fed will be increasing short-term rates.
Possible effects on the mortgage market
The Fed’s decision to start scaling back its buying program may not seem as if it is a big deal. After all, a great deal of attention that could have otherwise been put on the Fed itself has been placed on the central bank as of late, as investors are putting a lot of focus on how and when the Central Bank may attempt to comfortably cut the overwhelming support it has been offering to the market. Some believe that this is the main reason why the Fed has gone ahead and started to make plans to cut its own support, as it would’ve been difficult to do so otherwise if the same amount of attention was being paid to the Federal Reserve as the Central Bank.
As those who have been paying attention know, the Fed’s major goal in its bond-buying program has been to keep mortgage rates as low as possible in order to help revive the U.S. housing market. In just the past year alone, however, home prices have risen by 10%—a remarkably-high number that says a great deal about the economy as a whole. Home sales (both new and pre-owned) skyrocketed in early 2012, although since interest rates have risen, the incremental increase has slowed down a bit.
It’s difficult to tell exactly what will happen as a result of both the central bank and Federal Reserve’s attempt to pull the huge amount of support they’ve been offering, and home sales may indeed begin to decline. As a whole, however, the increasing numbers show that the economy is at the point where people can afford to pay slightly higher interest rates. People need housing, after all, and—one the results are in—2013 is likely to be a banner year in comparison with the recession that occurred just a few years ago.
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