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These Four Words From the Fed Should Wake Up Homebuyers

With one line in its meeting statement, the Federal Reserve put in motion a major shift in the housing market. What homebuyers should know.

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The statements following Federal Open Market Committee (FOMC) meetings aren’t exactly page-turners. In fact, most are nearly identical. But homebuyers should be aware of four words from today’s statement:

“May soon be warranted.”

These words refer to the Federal Reserve's plan to taper its asset purchases which have been stimulating the economy and keeping mortgage rates artificially low during the pandemic. Coming from Fed Chair Jerome Powell, who has been keeping taper plans notoriously tight to his vest, this phrase might as well read “The British are coming.”

This slight language change is the Fed’s way of signalling that it could begin tapering this year and likely announce a plan at its next meeting in November.

For homebuyers, that means the beginning of the end for exceptionally low mortgage rates, although signs point to a slow, gradual increase.

How the Federal Reserve Taper affects mortgage rates

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 Federal Reserve is preparing to gradually reduce or “taper” it’s purchase of mortgage-backed securities. This will surely cause mortgage rates to rise, although it’s hard to predict when and by how much.

In 2013, the mere announcement of a taper plan caused mortgage rates to spike a full percentage point in less than two months in what came to be known as the “Taper Tantrum.”

Screenshot from Freddie Mac PMMS.

This time around, Powell and the FOMC seem intent on avoiding another Taper Tantrum. The Fed has been laying a trail of Taper breadcrumbs for several months leading up to the September meeting. In a press conference following the meeting, Powell stressed that it would be a “very gradual taper” and that the central bank would have the freedom to speed it up or slow it down based on economic events.

The latest mortgage forecasts from Freddie Mac have the 30-year fixed mortgage rate below 4% throughout 2022, which is still very low, historically speaking. But people looking to lock in a sub-3% rate to purchase or refinance a home may want to accelerate their timetable.

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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