Will the Fed's Taper Announcement Affect Mortgage Rates?

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The U.S. Federal government announced yesterday it will be cutting its bond buying program by $10 billion a month, a move that can adversely affect homebuyers in the form of higher interest rates. 

Since September 2012, the government has been purchasing $85 billion in bonds each month as part of a program called "quantitative easing" in an attempt to lower long-term interest rates following the financial crisis.

After a two-day meeting, Fed Chairman Ben Bernanke announced the government will cut back on both types of bond purchases -- mortgaged-back securities and Treasuries -- by $5 billion each month starting in January. The new cut marks the beginning of a gradual end to the program, nicknamed by Wall Street as "tapering." 

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases," the Fed said in a statement.

The housing market witnessed a boost from the Fed's quantitive easing program, as mortgage rates reached historic lows in the last few years. In May, when tapering first came up as a possibility later in the year, interest rates began to rise, with the 30-year fixed-rate mortgaged increasing from 3.88 percent to 4.38 percent.  

While mortgages remain low, yesterday's announcement could cause a pause in the housing market recovery, analysts say. 

"You have to be prepared for interest rates to be rising. Not dramatically, but they will move higher across the board," David Joy, chief market strategist at Ameriprise Financial, told Fox Business. "So if you are taking out a mortgage, buying a car or getting a new credit card, you can expect a higher rate."

However, in yesterday's announcement Fed Chairman Ben Bernanke said the central bank is committed to hold its key short-term rate near zero, while keeping watch on inflation. 

The Fed "is determined to avoid inflation that is too low, as well as inflation that is too high," Mr. Bernanke said.

Prior to the announcement, the U.S. housing market gained more momentum this week with from various market measures. CoreLogic reported 791,000 more U.S. homes returned to a state of positive equity during the third quarter. Builder confidence for newly built, single-family homes increased in December, reaching levels seen in 2005. 

Yesterday the U.S. Census Bureau reported the number of U.S. housing starts in November increased 22.7 percent from the prior month, reaching its highest level in more than five years. 

As we approach year-end, many hope this latest announcement from the Fed will not derail the overall recovery seen so far. 

"Housing has been the backbone to the recovery," Mr. Joy said. "When rates backed up over the summer, housing number flatlined. They didn't decline per se, but they stopped accelerating. So if rates move higher it will be important to keep an eye on activity."