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What is the Fed Taper and How Will it Affect Home Buying

Talks of the "Fed Taper," or reduction of economic stimulus, are ramping up. See how the Federal Reserve's actions may impact home buying.

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The window for exceptionally low interest rates may be closing sooner than expected as Federal Reserve officials discuss reducing their asset purchases by the end of the year.

This “Fed taper” refers to the amount of mortgage bonds and other securities the Federal Reserve is buying to keep interest rates artificially low.

Reporting by The Wall Street Journal found that several Fed officials support a timetable in which the central bank begins tapering its asset purchases in the next few months and ends in mid-2022. Other officials have urged patience to see the September jobs report and the economic effect of the delta variant.

Either way, the taper conversation is substantial, which means a rise in mortgage interest rates may not be far off.

How Fed tapering affects homebuyers

In short, the Fed tapering asset purchases could drive up rates, making homeownership less affordable.

That could be a concern, since home prices are already making it hard for first-time buyers to afford even the most basic starter home.

Still, no one is predicting a falling sky. Freddie Mac forecasts an average 30-year mortgage rate at just 3.7% for 2022, adding about $150 per month to a $300,000 mortgage compared to today’s rates.

Rents are sure to skyrocket faster than that.

While a Fed taper isn’t pleasant, it has to happen sometime, and the economy and average buyer seem to be in a fair position to handle it.

When will the Fed taper start?

In response to the COVID-19 economic recession, the Federal Reserve increased its purchase of mortgage-backed securities through a process called quantitative easing. This process placed huge demand for mortgage bonds, therefore driving down mortgage rates. Low interest rates fueled homebuying and stimulated the recovering economy.

With the economy back on track, the question of when to reduce or “taper” quantitative easing looms.

The Fed set the goal of “substantial further progress” toward robust employment and 2% average inflation back in December. A recent string of promising jobs reports and core inflation running above 3% suggests that the economy has reached this benchmark.

With this goal within reach – or already in hand, depending on who you ask – the Fed will taper its purchase of mortgage-backed securities and interest rates will increase.

In fact, in 2013 when the Fed last announced it would begin tapering mortgage interest rates shot up a full percentage point in less than two months in what came to be known as the “Taper Tantrum.”

Today’s circumstances are much different. Unemployment is lower, inflation is higher, and the economy is recovering at a faster pace. However, the taper announcement still has the potential to disrupt the market and raise interest rates.

According to the Wall Street Journal, the Fed could announce as early as its Sept. 21-22 meeting its intention to begin tapering before the end of the year.

An increase in interest rates may sideline some homebuyers and cause others to drop their purchase price, putting downward pressure on home prices that have run unchecked for over a year.

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

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