Well after months and months of speculation, the Federal Reserve Board last month finally announced the start of their "tapering" program in which they will reduce the amount of their purchases of government and mortgage-backed securities (MBS) by $10 billion per month. Starting in January, the Fed will purchase $75 billion dollars monthly instead of $85 billion dollars. This program was instituted during the financial crisis both to keep long-term rates lower and provide some stability in a mortgage market which was devastated by the crisis. By lowering the amount of purchases, the Fed is officially proclaiming that America is well on the road to recovery.
This does not mean that the Fed is about to raise interest rates. What it means is that the Fed will be exerting less influence over long-term rates which are of utmost importance to consumers because fixed-rate mortgages are influenced significantly by the direction of long-term interest rates. The Fed has been going out of its way to say this does not mean that they are ready to raise short-term rates. The Fed has emphasized its commitment to keep short-term interest rates "exceptionally low" until either the unemployment rate falls to around 6.5 percent or the inflation rate exceeds 2.5 percent a year.
Why is this good news?
Well, the stock markets rallied decisively on the news. The economy is recovering and this is a good thing. Long-term rates rise when the economy is stronger. It has been five years since the depth of the recession was upon us. For five years, we have been recovering. The recovery has been painful and slow with many starts and stops. Yet, as we approach 2014, there seems to be more optimism regarding the status of the economy recovery and our future. Some of this optimism is rooted in facts and some of this optimism comes from sentiment.
First the facts
For the first time in five years, the real estate market participated and is contributing in the nation’s economic recovery. When homeowners feel wealthier because of rising home values, the entire economy benefits. It is no coincidence that the economy grew at stronger pace in each of the past four quarters—including a robust 4.1percent growth rate in the third quarter. Employment growth has picked up and this job growth is picking up within a variety of sectors—including state and local governments—which is a sector that was laying off tens of thousands just a few years ago.
About those feelings
For a long time, I have been saying that this was a crisis of confidence. Confidence is a feeling. In general, we can see that consumer confidence has been rising as 2014 begins. There is even hope that Congress is starting to show stronger levels of bi-partisanship—which is a good thing with the debt limit issue about to hit in the first quarter of 2014. Confidence allows people to make important decisions, such as getting married and starting a family.
Here is to a great 2014 for all, and hoping the growth in good feelings continue for the remainder of the year.
Dave Hershman is a top author in the mortgage industry with seven books published, including The Complete Mortgage Management Kit. Dave is also director of branch support for McLean Mortgage. He may be reached by e-mail at [email protected]
or visit www.originationpro.com.