Planning the End of Fed Stimulus: Can the Housing Recovery Continue Amid Tapering Talk?

June 27, 2013 | Eric Gaylord, CFA, Principal

Since the end of 2008, the Federal Reserve has held the Federal Funds Rate at approximately 0% in an attempt to stimulate bank lending and revive the collapsing U.S. housing market. The aggressively accommodative monetary policy has caused borrowing rates on traditional 30-year mortgages to steadily decrease from 5.94% in September of 2008 to 3.40% at the beginning of 2013. Following the commencement of this loose monetary policy and a period of bank deleveraging, the deterioration in the housing market began to subside by the close of 2009. Accordingly, the percentage of mortgages considered seriously delinquent (i.e. 90+ days past due or in foreclosure) has steadily declined since then. Additionally, the level of “Shadow Inventory” in the housing market which includes not only homes for sale but also estimates of those that may come to market has decreased by over one third during the same period.

Collectively, these forces have driven a significant recovery in the housing market. However, the recovery may soon face some considerable headwinds as mortgage rates have recently reversed their downward trend. This reversal was partly a result of the release of the Federal Open Market Committee minutes on June 19th in which the Fed indicated the mere possibility of scaling back its stimulus program later this year. While the Fed’s policy remains unchanged and the Federal Funds Rate is expected to remain low through 2015, the perception that federal stimulus cannot continue has had a tangible impact. One week after the release of Fed minutes, the average borrowing rate on a 30-year fixed mortgage has increased from below 4.0% to around 4.6%, one of the more rapid rises in U.S. history. According to the Mortgage Bankers Association Weekly Mortgage Applications Survey, applications fell 3.0% on a seasonally-adjusted basis in the week ending June 21st and 3.3% in the week prior.

It remains to be seen if the housing market, which has been aided by decreasing borrowing rates to this point, can continue along its current trajectory of recovery with rising borrowing costs for homebuyers. A stalling housing recovery would have negative implications across the broad economy and slow nascent growth.