Mortgage Rates Expected to Increase, Fed To Reduce Bond Purchases

Ben Bernake announced yesterday that the Federal Reserve will begin reducing the amount of bonds it will purchase, from $85 billion per month to $75 billion.  This is the first step taken to "take off the training wheels" on the federal stimulus it created to get the United States out of it's recession.  The Fed’s purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting in January, Bernanke said.

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington today after a meeting of the Federal Open Market Committee.

Stocks rallied on the good news reported regarding the improved economy and reduced unemployment figures.  The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Since the Fed began signaling in May that it may soon begin to dial down the purchases, interest rates have drifted higher, with the average 30-year fixed mortgage rate rising to 4.42% from 3.35% in May. The rising rates helped convince the Fed to delay tapering in September.  Rates are expected to continue to increase, but not at an immediate, drastic amount.  However, it will have an affect on the purchasing power for home buyers.

Further complicating the picture is that Fed Chairman Ben Bernanke plans to step down when his term ends in January. Vice Chair Janet Yellen, who has been nominated to succeed him, has expressed an even more pro-growth approach but must deal with a policymaking committee with diverse views of the stimulus.

*Information source from Bloomberg News and USA Today

Cleveland, Northeast OH Area Real Estate Market July 2013

According to the Northeast Ohio Regional Multiple Listing Service (NORMLS) and an article from the Cleveland Plain Dealer newspaper, homes sales in the region continue to surpass last year's sales figures. Lower home inventory, higher rental prices and higher buyer demand due to low (but climbing) interest rates, is driving this increase in activity and increase in sales prices.  The low inventory continues to increase new construction demand, as well.
Sales comparing July 2012 to July 2013 show increasing sales figures by double digits, like they did in May and June.  Among the 15 counties in Northeast Ohio, single family home sales are up 22.6% and 30.2% for condominium sales.  From June to July 2013, sales rose by 9%. 

By comparison, Northeast Ohio is showing a 6.3% price increase from last year, with the state of Ohio's at 7.2%. Ohio's sales volume increase was also up by over 25.8% from July 2012.  The US market saw a 13.7% increase in sales price from the year before, and is showing a sales volume increase of only 17.2%.  Northeast Ohio's price increases have improved to a lesser degree the past couple months, while Ohio and the US have been fairly stable.

"Although housing affordability conditions will become less attractive, jobs are being added to the economy," Lawrence Yun, chief economist for the National Association of Realtors, said in a written statement. "And mortgage underwriting standards should normalize over time from current stringent conditions as default rates fall."

The key point here is that the market is starting to stabilize and shifting to a seller's market.  Sellers are getting more for their homes than last year, with buyers paying a bit more to purchase a home to take advantage of the low interest rates.  Buyers should note that interest rates have begun to increase over the past several months, hovering around 4.5%. 

This is a great time for buyers who also have a home to sell, because rates are still relatively low on the buying side, but home values have risen in many areas to improve the financial return on the selling side.  If the economy continues to improve, buyers in the current market will be able to realize value gains for the homes they purchase as well.