Tapering of bond purchases by the Fed will likely lead to a slowdown in home purchase and refi demand.

As expected, the Federal Reserve announced it will start unwinding its $120 billion monthly bond purchases late in November. The Fed had been purchasing $80 billion in Treasury securities each month and said it will reduce that to $70 billion in November and to $60 billion in December. It said it also will reduce purchases of mortgage-backed securities from $40 billion to $35 billion in November, and to $30 billion in December. Consensus forecasts from Fannie Mae, Freddie Mac, the Mortgage Bankers Association (MBA), and the National Association of Realtors (NAR) predict mortgage rates will hit 3.2% by the end of the year, and 3.7% by the end of 2022. Odeta Kushi, deputy chief economist for First American Financial Corp., has examined the history of various eras of rate increases and offers some insight into how home sales and prices may be affected by the Fed’s tapering of bond purchase -- “Historically, when mortgage rates rise, existing-home sales don’t necessarily fall, but the same resiliency cannot be said of refinance mortgage demand. In each rising mortgage rate era, refinance applications fall, which is not surprising as the decision to refinance is typically a strictly financial one.” With regard to housing prices, house prices are more resistant to rising mortgage rates primarily because home sellers would rather withdraw from the market than sell at lower prices — a phenomenon we refer to as ‘downside sticky.” Kushi concluded by stating that context matters -- “The Fed tapering likely will prompt mortgage rates to rise, but it does not mean that the housing market will crash, although we may see some cooling of purchase demand, and definitely a cooling of refinance demand,” she said. “For purchase demand, context matters, and an improving economy and millennials aging into their prime home-buying years means the context remains good for the housing market.”

Source: National Mortgage Professional