Yesterday’s decision by the Federal Reserve’s policy making Federal Open Market Committee (FOMC) to unwind the central bank’s $4.5 trillion mortgage asset purchase program was greeted with caution by industry leaders.
"For much of the past decade, the Fed has been the largest investor in mortgages in the world," said Mortgage Bankers Association Chief Economist Mike Fratantoni. "The Fed took the first step today to begin to shrink their holdings. We expect that private investors will, over time, step in to buy MBS. But we can't be certain how quickly they will replace the steady demand that the Fed has been providing."
“As the Federal Reserve indicated today, the huge purchases of mortgage-backed securities and U.S. government bonds could not have continued and will unwind beginning next month,” said Lawrence Yun, Chief Economist at the National Association of Realtors (NAR). “Looking within the statement, the pace of selling looks to be in slow motion. That means that mortgage rates would rise up only modestly over time. Given the pace of unwinding asset purchases with the fewer rounds of anticipated short-term rate hikes over the next two years, it’s expected that mortgage rates should still remain at historically attractive levels. The 30-year fixed rate may rise to slightly above four percent by the end of this year, and may only reach 4.7 percent by the end of 2018.”
“As the FOMC continues to increase the Federal Funds rate and, more importantly, embarks on ‘Quantitative Un-Easing,’ affordability for the first-time homebuyer is likely to decline further,” said Mark Fleming, Chief Economist for First American Financial Corp. “Yet, it would take dramatically higher mortgage rates to meaningfully erode purchasing-power for the first-time homebuyer. So, worry not, existing homeowner, because nothing changes, and fear not, first-time homebuyer. While a home may be less affordable in the near future, it will remain more affordable than it was for your parent’s generation.”
The Fed also opted not to raise interest rates at this time, which one prominent economist viewed with some confusion regarding the central bank’s next steps.
"With the commencement of the balance sheet wind-down, the Fed shifts its focus to the next rate hike," said Curt Long, Chief Economist at the National Association of Federally-Insured Credit Unions. "On that front, the committee offered conflicting data. In its projections committee members downgraded their outlook on inflation, which would naturally argue for a delay in rate increases. However, the interest rate projections indicate that the committee still expects a quarter-point hike in December. The biggest downgrade was reserved for long-term rates, and the committee may see persistently weak inflation as having long-lasting effects on interest rates and monetary policy, even if the short-term impact is negligible."