Let’s Keep the Taper in Perspective

*Let’s Keep The Taper In Perspective*
**By George Yacik**

NEW-GeorgeY***Billions of dollars have been gained and lost in the past several months by investors betting on when the Federal Reserve would begin tapering its “quantitative easing” program, which has kept stocks prices high and interest rates at historically low levels for well over a year. The slightest inkling of the Fed pulling back on its $85 billion a month purchases of Treasury and mortgages has raised interest rates on mortgages to their highest point in over two years.

****Now it looks like taper time is finally upon us. In the past two weeks, the presidents of no less than four regional Federal Reserve banks said that the Fed was likely to start cutting back on its purchases as soon as next month. The trigger for tapering was supposedly the decrease in the unemployment rate in July to 7.4%.

****While it’s still not clear if the Fed really will start tapering in September or not, and if so, by how much, all signals point to it beginning in the not too distant future. However, before that happens, we need to keep something important in mind, and that’s what tapering is not.

****We’ve gotten so used to hearing the dreaded word taper recently that I think we’ve forgotten what exactly the word means. What it doesn’t mean is tightening.

****Some people, I think, have started to panic and are worried that once the Fed starts tapering, it will at the same time starting tightening monetary policy, driving interest rates sharply higher and snuffing out the nascent housing recovery. Fears of that happening have gotten way over blown, and they’re just not realistic. In short, in my view (full disclosure: I’m not an economist), the markets have overreacted.

****Yes, it’s true that mortgage interest rates have risen sharply higher in recent months as the taper talk has gotten louder. According to Freddie Mac, the average rate on a 30-year mortgage in early August was 4.40%. That’s up over 100 basis points since early May, and the highest rate in nearly two years.

****However, it looks to me like mortgage rates have gotten about as high as they’re likely to get for a while, or pretty close to it, even if the Fed really does start tapering soon. But even if rates were to rise a bit higher – say, to 5% for a 30-year mortgage – that’s not nearly enough to kill the housing recovery.

****Are people really going to stop buying houses if rates rise from 4.5% to 5%, even if they can still buy a house at a 30% discount to the 2008 price? I find that hard to believe.

****A reading of the Fed’s actual statements on the matter – and its reading of the economy – indicate that mortgage lenders and borrowers really have little to fear of any sharp rise in interest rates dowsing the housing recovery. The Fed just isn’t about to let that happen.

****In its July 31 official statement, the Fed’s Federal Open Market Committee went out of its way to note that “the housing sector has been strengthening, but mortgage rates have risen somewhat.” Clearly, the Fed is watching this carefully.

****As it has in many of its past previous statements, it also “reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens (my emphasis).”

****In other words, the Fed knows how precarious and fragile the economic recovery has been, so low interest rates are here to stay for the foreseeable future, tapering or not. That should make everyone in the mortgage and housing industries happy.

****As I’ve said in this space before, interest rates aren’t what’s keeping many people from getting mortgages, its overly tight lender underwriting. Unfortunately, the Fed can’t do much about that part. But they are doing what they can to keep the housing recovery going, and that’s by keeping interest rates low. And that’s not likely to change any time soon.

George Yacik has been a financial writer for more than 30 years. After working 12 years at The Bond Buyer and American Banker as a reporter and editor, he joined SMR Research Corp. as a vice president, where he was the lead research analyst and project leader for SMR’s studies on residential mortgages and home equity lending. Since 2008 he has been writing for a variety of mortgage-related and financial publications. George is based in Stratford, CT, and can be reached at gyacik@yahoo.com.