The Federal Reserve needs to be more aggressive in providing detail on what would lead it to eventually raise interest rates in order to prevent uncertainty among investors that could rile markets and hurt the economic recovery, a top Fed official said on Tuesday. In an interview with Reuters, John Williams, president of the San Francisco Federal Reserve Bank, said the central bank needed to do more to convince investors that rates will stay low long after the Fed stops buying bonds. It should not wait to twin that message with a decision on cutting back its bond-buying stimulus, he said. But once the Fed decides the economy is strong enough for the Fed to reduce its $85 billion in monthly bond purchases, it should announce an end date and a purchase total for the program, Williams said.
For now, he said, the Fed must drive the message of continued support for the economy. “My view would be that we would not be raising the funds rate even if the unemployment rate was below 6.5 percent as long as inflation continued to be low, for some time,” Williams said. “We need to be communicating more about the post-6.5-percent world now, because it could be with us much sooner than we expect, and I don’t want market participants to be surprised.”
Although both Fed Chairman Ben Bernanke and Vice Chair Janet Yellen have emphasized that a fall in unemployment to below 6.5 percent will not trigger rate hikes, neither has offered clear guidance on what would. Yellen is expected to soon win Senate confirmation to become Fed chief when Bernanke’s term expires on January 31. “We could be a little more concrete about what we are going to be looking for liftoff,” Williams said. “We’re really going to be looking obviously for not only improvement in the labor market, but looking for continued growth.”
The goal, he said, is that people understand the Fed is “not in a rush” to raise interest rates. For his part, he said, he does not expect rates to rise until the latter part of 2015.
U.S. policymakers have fretted about how markets reacted earlier this year to signals that the Fed was preparing to reduce its monthly bond purchases. Investors pushed up borrowing costs so fast that Fed officials worried they could undercut the still-fragile recovery. An opposite but equally sharp reaction was seen in September when the Fed unexpectedly decided not to taper bond-buying, causing investors to push borrowing costs back down. “The market swings way too much both ways,” Williams said. “I wish in September we could have had some way of showing that any movement towards tapering is not an action that starts a whole tightening process. … You can taper and still plan to keep interest rates low for a very long time.”
Filed under Economy, Rates
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The average rate for a 30-year, fixed-rate loan, the most popular mortgage product, fell to 4.22% from 4.35% last week, Freddie Mac reported. Meanwhile, average rates on 15-year, fixed-rate loans, typically used for refinancing higher interest mortgages, dropped to 3.27% from 3.35% the week before. This week’s drop was one of the steepest during a year of mostly rising rates. The 30-year started 2013 at 3.34% and reached a high of 4.58% in August. Frank Nothaft, Freddie’s chief economist said fixed mortgage rates fell amid reports of weaker manufacturing growth, with industrial production declining by 0.1% in October, below expectations. He also cited declines in the overall inflation rate, noting that the consumer price index saw its “smallest increase since October 2009″ last month.
Weighing on mortgage rates long-term is the Fed’s stimulus program — known as quantitative easing — which entails that it buy $85 billion in bonds each month. The impending appointment of Janet Yellen as Fed chairman, who has defended the QE3 policy, has many believing the Fed’s policy will remain in place. “Ms. Yellen would likely continue the QE policies started under Chairman Bernanke until there was very clear evidence that the economy would thrive, not just endure, without them,” said Keith Gumbinger, a spokesman for HSH.com, a mortgage information company.
“Housing market sentiment has clearly suffered in the wake of the recent government shutdown and debt ceiling debate,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “In October, we saw attitudes toward both the economy and the current buying environment experience their largest one-month drops in the survey’s three-year history. While this decline in consumer optimism may portend a slowing of the housing recovery, supply constraint data suggest that we are likely to see continued positive growth in home prices. That being said, October’s survey results suggest that consumer attitudes are highly responsive to ongoing debate and decision-making in Washington. Three key budget and debt ceiling dates loom in December, January, and February. The handling of each will likely play a key role in determining the pace and timing of any recovery in consumer sentiment.”
Homeownership and Renting
- At 2.9 percent, the average 12-month home price change expectation continued to fall, decreasing 0.2 percent from last month.
- The share of people who say home prices will go up in the next 12 months fell by 6 percentage points to 46 percent, while those who say home prices will go down increased 4 percentage points to 10 percent.
- The share of respondents who say mortgage rates will go up in the next 12 months fell 6 percentage points from last month to 57 percent.
- The share who say it is a good time to buy a house had the biggest ever one-month change, and fell to a survey low of 65 percent.
- The average 12-month rental price change expectation increased 1 percentage point to 4.4 percent, a 12-month survey high.
- Fifty-two percent of those surveyed say home rental prices will go up in the next 12 months, remaining at the same level from last month.
- Forty-six percent of respondents think it would be easy for them to get a home mortgage today, remaining steady since January.
- The share of respondents who said they would buy if they were going to move increased slightly to 70 percent, a new survey high.
The Economy and Household Finances
- At 27 percent, the share of respondents who say the economy is on the right track fell 12 percentage points from September, which is the biggest monthly record change in the survey’s history.
- The share of people who said their personal financial situation would get worse in the next 12 months hit a survey high of 22 percent.
- The share of respondents who say their household income is significantly higher than it was 12 months ago fell by 2 percentage points from September to 20 percent.
- At 34 percent, the share of respondents who say their household expenses are significantly higher than they were 12 months ago rose 1 percentage point from last month.
The most detailed consumer attitudinal survey of its kind, the Fannie Mae National Housing Survey polled 1,000 Americans via live telephone interview to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence. Homeowners and renters are asked more than 100 questions used to track attitudinal shifts (findings are compared to the same survey conducted monthly beginning June 2010). Fannie Mae conducts this survey and shares monthly and quarterly results so that we may help industry partners and market participants target our collective efforts to stabilize the housing market in the near-term, and provide support in the future.
Existing home sales slipped in September as higher prices hurt affordability, the National Association of Realtors reported. Home sales dropped 1.9% in September to a seasonally adjusted annual rate of 5.29 million from 5.39 million in August. They were still 10.7% above year ago levels, the association said Monday. The decline was expected, says Lawrence Yun, NAR chief economist. With home prices up 12.4% in August from year-ago levels, affordability has fallen to a five-year low, especially given mostly flat incomes.
The September numbers may also reflect the impact from the interest rate spike that hit in May and early June. Some people may have rushed to buy to lock in lower rates, says Stephanie Karol of IHS Global Insight. Going forward, higher mortgage interest rates will further cut into affordability, Yun says. The October numbers are likely to show home sale delays associated with the government shutdown.
Distressed homes — foreclosures and short sales — accounted for 14% of September sales vs. 24% a year ago. Lower levels in the share of distressed sales account for some of the growth in median price. The shift away from distressed sales is a sign of recovery, says Trulia economist Jed Kolko. While all sales were up almost 11% year over year, they were up 25% if distressed sales are excluded, he says.
Higher interest rates, fewer investor buyers and more homes for sale are all contributing to smaller price gains, economists say. Last week, 30-year fixed rate loans averaged 4.28%, up from 3.37% a year ago, Freddie Mac said. The government shutdown that ended last week and the related debate over raising the debt ceiling will also likely have an adverse effect on October home sales, says Leslie Appleton-Young, economist for the California Association of Realtors. The association said last week that California home sales declined in September for the second straight month.
Incoming economic data show that growth slowed in the third quarter, although recent fiscal risks threaten a previously expected pickup in growth in the current quarter, according to Fannie Mae’s Economic & Strategic Research Group. Consumers remain key to the outlook, but factors such as the recent federal government shutdown and the furlough of 500,000 workers, as well as the debt ceiling debate, which was resolved temporarily on October 16, appear to be weighing on consumer confidence and tempering real consumer spending. As a result of the fiscal events and the slowing momentum in economic activity from the second quarter to the third quarter, full-year growth is expected to come in at 1.9 percent, a slight downgrade from 2.0 percent in the prior forecast.
“Our October economic and housing forecast is largely unchanged from the previous forecast as we anticipated the modest levels of consumer spending seen toward the end of the third quarter. However, fiscal uncertainties associated with the federal government shutdown, the protracted negotiations to raise the debt ceiling, and the timing of the Federal Reserve’s tapering of its asset purchase program, pose significant downside risks to economic activity in the current quarter,” said Fannie Mae Chief Economist Doug Duncan. “In particular, the contentious Congressional negotiations that led ultimately to Congress raising the debt ceiling may have a lingering effect on consumer attitudes and spending, as was seen following the 2011 negotiations.”
“On the bright side, these fiscal policy issues appear to have had only minimal effect on the housing market to date, which continues to improve overall,” said Duncan. “Notably, the rapid appreciation of home prices during the past year has contributed significantly to household net worth gains and may help to cushion some of the fallout from the fiscal policy debate. Also, the Fed’s continuation of securities purchases will likely keep mortgage rates low, enabling more homeowners to take advantage of refinance opportunities.”
Filed under Economy, Rates
Before closing on a mortgage backed by Fannie Mae or Freddie Mac, banks must verify a borrower’s income with the IRS. But IRS operations are curtailed because of the shutdown, and the agency won’t be available to handle the paperwork the banks need to close on the loans.
The shutdown’s effect on the Social Security Administration could also cause a snag for borrowers. Lenders often turn to that agency to verify a borrower’s identity and prevent fraud on mortgage applications. For borrowers who are far along in the mortgage process, the good news is the shutdown likely won’t stop your loan from going through. But those who apply for new mortgages, including refinancings, during the shutdown should be prepared to wait.
Wells Fargo, the nation’s biggest mortgage lender, said new applications will not get completed until after the shutdown ends and when borrower’s income claims can be officially verified. Other banks take a similar position. “All the banks I deal with have told us they would not be able to close,” said Dan Frommeyer, president of the National Association of Mortgage Brokers.
Mortgages insured by the Federal Housing Administration could also face delays. The agency is operating with a skeleton staff — its shutdown plan called for furloughing 96% of its workers — and loan processing will suffer. However, many of the biggest FHA lenders have the authority to make their own underwriting decisions and won’t need to wait for the IRS to come back online, and FHA mortgages issued through those firms will move forward.
If the shutdown ends quickly, its impact on mortgage lending and the housing market will be slight, according to Keith Gumbinger of HSH.com, a mortgage information company. If it lasts a few weeks or longer, he said, home sales will slow and that could be a significant brake on the nation’s economy.