Feds Bond Buying Continues as Economy Remains Fragile

The Federal Reserve announced today that they will not begin to taper their bond buying as the economy remains fragile. Just the mention of potential tapering has caused markets to become volatile and mortgage rates to rise over the summer months.

While most economists predicted that tapering would begin this quarter, the Feds surprised many with their announcement. Based on current economic data that is presenting mixed messages, the Feds have decided to wait for more evidence that the recovery will be sustained when tapering beings. It was mentioned that unemployment remains at unacceptable levels and inflation below the Feds objective. In addition, the current rise in home mortgage rates has become a threat to the housing industry recovery where any slow down can have an impact on the entire economy.

For several months, mortgage volume has dropped as rates have increased on the expectation that tapering would begin soon. Mortgage refinances have been dealt the biggest blow during this time which has already led to the announcement of layoffs by major lenders. However, in anticipation of possible higher rates, refinance application volume for week ending September 13th was at 61% of total volume as compared to 57% the week before, according to the Mortgage Bankers Association. HARP refinance applications continue to be strong and increased to 40% which is the highest since the MBA began tracking this information in 2012. From inception through the second quarter of 2013, 2,739,274 refinances have been done through the HARP refinance program.

Reported by the MBAA, total mortgage applications dropped 14% during the month of August. Applications for new home purchases were at 35,000 of which 17.3% were for FHA loans which are usually popular with first time home buyers. FHA mortgages, which have higher loan limits, were once used by many home buyers in lieu of jumbo loans. However, jumbo loan rates have dropped dramatically to levels at or below rates for conventional loans which has led many home buyers to take on jumbo financing.

The anticipation of tapering and the threat interest rates returning to normal levels has already shown signs of slowing the housing market. However, Federal Reserve Chairman, Ben Bernanke, stated that bond buying is tied to combined data that reflects growth, inflation and unemployment. He also stated that due to this the Feds do not have any fixed time schedule for tapering. He stated that he did not recall saying they would do anything in this meeting, but that they would do what is right for the economy. At this time, he is also concerned that a government shutdown or failure to raise the coming debt ceiling would have serious consequences.

In the end, predictions are just that and it's unfortunate that so much of the economy becomes affected by forecasting. It is inevitable that Fed tapering will begin at some point, but only when economic conditions improve and will done in a way not to cause harm to the economy. It is obvious that reacting to predictions can cause more harm to the economy than the act itself.

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