A December Fed Taper Would Help the Housing Recovery in 2014
After last week’s upbeat jobs report, we are again on taper watch. The Federal Reserve meets next from December 17-18, and many are debating whether or not the Fed will keep its easy money policies in place. One argument that hasn’t been considered is that the best timing for a taper may actually be in December, at least for the housing market.
Fed
Sure, unwinding the Fed’s stimulus program will boost mortgage rates and make home-buying more expensive. However, data from Redfin’s recent survey of homebuyers reveals a highly distorted view of what a “normal” mortgage interest rate looks like. A rate jump now would help homebuyers adjust to higher rates during real estate’s slow season and keep the housing market, a top contributor to U.S. economic growth, on a smoother path in 2014.
As a technology-powered real estate brokerage, we regularly poll our home-buying clients to get their perspectives on the real estate market. In our November survey of homebuyers across Redfin’s 22 major metro areas, we asked buyers what they considered “normal” for a 30-year fixed mortgage rate.
The results gave us serious pause. A combined 83 percent considered a “normal” rate for a 30-year fixed rate mortgage loan to fall under 5 percent.
Normal rates
Under 5 percent? While rates hovered around 4.3 percent in November, they have averaged 6.7 percent since 1990. Rates never once fell below 5 percent until March 2009.
Even more surprising, both seasoned and first-time buyers think a rate below 5 percent is normal; the only difference between the two is that one in three first-timers think a rate below 4 percent is normal, compared to one and four seasoned homebuyers.
Rates by experience
Clearly, the Fed’s easy-money policies since the housing crash have trained buyers to expect mortgage rates that start with threes and fours. Even more worrying, buyers are showing a high degree of intolerance toward mortgage rate fluctuations, another revelation from this month’s survey. More than 40 percent said they would be unable or unwilling to buy a home if rates rose much further.
These data suggest that the housing recovery could be in for an especially bumpy road in 2014 as the Fed weans the country off economic life support. As that happens, it is reasonable to expect rates to exceed 5 percent. In reaction, many buyers will slam on the brakes and take time to adjust their budget, neighborhood preferences, and expectations accordingly.
This summer gave us an idea of what we can expect. Two weeks after mortgage rates spiked about 1 percentage point in June, the number of Redfin customers taking tours and signing offers dropped 14 percent and 12 percent, respectively. At the same time, the number of brand new homes sold across the country plunged 13.4% from June to July.
With the real estate market in its slow season as the holidays approach, a December taper would give buyers time to come to terms with the change before they kick off their 2014 home search. An early 2014 taper, on the other hand, would throw water on the market when it’s really heating up.
Instead of writing a letter to Santa this year, we’re writing a letter to the Federal Reserve. Let’s get this show on the road so buyers can start the new year off with grounded expectations.