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    Tapering: What Does it Mean and How Will it Affect Your Next Transaction?



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    What is Tapering and How Can It Impact You

    Hello, Mortgage Mike here today to talk to you about the word “taper.” Over the past year, this word has been growing in popularity. What the word “taper” is referring to is the Federal Reserve slowing down, or tapering, its purchases of tenure Treasury Notes and mortgage-backed securities as part of Quantitative Easing. Since this is the third round of Quantitative Easing, it’s generally referred to as “QE3.”

    From October 2012 up until this January, the Fed was purchasing $45 billion per month in tenure Treasury Notes and $40 billion per month in mortgage-backed securities. As we all know, this has helped push mortgage rates to the lowest level in history and push the stock market to all-time highs. Since December 2013, the Fed has met twice; each time they met, they decided to reduce purchases by $10 billion per month. This reduction was split evenly between tenure Treasury Notes and mortgage-backed securities. It is also widely believed that after each Fed meeting, which is every six weeks, the Fed will be out of the bond-buying market entirely.

    Since this is the third round of Federal intervention in the mortgage market, we have history to consider as the Fed winds down their current program. In both QE1 and QE2, mortgage rates initially rose higher as the Fed stepped out of the mortgage market. However, as the money began to flow out of the stock market and into the bond, rates dropped significantly. Will history repeat itself after QE3, or will this push rates higher?

    Most experts believe mortgage rates will be pushed higher, but the current trend is not supporting this widely popular belief. While most experts expected rates to immediately rise, the rates have actually lowered since the Fed announced that they would begin tapering purchases. We believe that the Fed’s taper program failed to meet its employment growth objectives and that rising rates will likely be tied to economic conditions.

    As the economy improves, interest rates will certainly be moving with it. We will likely see stronger growth in the job market in the coming months and rates may soon trend higher. Now should the stock market fall, the rise in rates will likely be limited as that will be a force keeping interest rates low. However, it is still expect to see rates rise to at least 5% by the end of 2014.

    If you want to follow the market and its impact on interest rates, check out our “Daily Rate Commentary” in the Daily Rate section of www.citycreekmortgage.com. If you are thinking about buying or selling a home in the near future, we highly suggest you do so before interest rates rise. Spring Bengzten and her real estate team highly suggest contacting them to do so! Feel free to call us at City Creek Mortgage or email us if you have any questions.

    Thanks and have a great day!

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