How the Fed’s tapering timeline could affect mortgage rates
The Federal Reserve could start its bond purchase tapering by mid-November. The minutes from September's Federal Open Market Committee meeting shows committee members discussing tapering bond and Treasury purchases by $5 billion and $10 billion each month, respectively. The target date to finally end the $120 billion a month in purchases ($80 billion in Treasurys, $40 billion in mortgage-backed securities) would end mid-2022 if there were no disruptions.
Raising interest rates, however, will be a more difficult process as the labor market continues to be an enigma for economists. More than 4 million Americans left their jobs in August, according to the Labor Department's latest Jobs Openings and Labor Turnover Survey (JOLTS). The Labor Department started keeping the JOLTS report in Dec. 2000 and August's 4.3 million quits is the highest on record and shows a 2.9% increase month over month.
The survey shows that people left their jobs for a myriad of reasons including sickness and lack of childcare related to the COVID-19 pandemic. Close to 900,000 food service and restaurant workers left their jobs in August along with 712,000 retail workers and more than half a million people working in healthcare and social assistance.
While not as closely followed as the Labor Department's non-farm payrolls jobs report, the Fed still keeps a close eye on the JOLTS report and takes it into consideration when adjusting financial policy.
The Fed's main issue right now is controlling inflation while it also tries to stabilize and grow the economy. Americans are seeing a surge in energy prices right now as demand rises and supply chain problems compound the issue. Economists don't believe this is a sign of an oncoming recession, but they are concerned that this will be a drag on economic growth especially as we enter colder months.
Will Fed's move raise mortgage interest rates?
When we talk about the Fed raising interest rates, we're referring to the overnight lending rate that banks are subject to, not consumers directly. Consumers do feel the effects of that interest rate in the form of things like credit card interest rates, but it does not directly affect mortgage interest rates.
What will affect mortgage interest rates is the Fed's decision to slow down its purchases of mortgage-back securities and Treasury notes. The Fed started making those purchases at the onset of the pandemic to ensure that as investors turned into a risk off mode, there were still buyers in the economy especially in the mortgage space. So when the buyers pull back, interest rates will rise, and that's what many economists expect to see as the Fed starts pulling back its bond purchases in the coming months.
The latest 30-year fixed-rate average from Freddie Mac shows 3.05%—its highest point since April 2021. Freddie Mac's economists said, "As inflationary pressure builds due to the ongoing pandemic and tightening monetary policy, we expect rates to continue a modest upswing. Historically speaking, rates are still low, but many potential homebuyers are staying on the sidelines due to high home price growth. Rising mortgage rates combined with growing home prices make affordability more challenging for potential homebuyers."
It's important to note that when we discuss the average mortgage interest rate, that does not mean that is the interest rate you will receive when you're ready to purchase a home. Things like credit score, personal debt, the type of loan you're applying for and your down payment are some of the major factors that influence what kind of interest rate you will qualify for. Make sure you discuss all of your options with a Movement Mortgage loan officer and get pre-approved before you start house hunting. That way you'll have a better idea of what you can afford!
As Freddie Mac's economists mentioned, affordability has become difficult as the demand for single-family homes is still extremely high during the pandemic. Consequently, it is not a question of if the conforming loan limit will be raised, it's a matter of just how much the Federal Housing Finance Authority will raise it. The FHFA announces its new conforming loan limits in November each year and, while the FHFA has not made its official announcement yet, more lenders have already said they'll set their conforming limits at $625,000 for 2022, including Movement Mortgage. The current conforming limit, as we mentioned last week, is $548,250. For consumers, the FHFA raising that rate means you can still get a government-backed loan, like an FHA loan with benefits for first-time homebuyers, but for a higher home price. The limits are meant to help make housing more affordable and accessible for larger numbers of Americans.
