The housing market has been on a roller coaster ride the past few months. In May, when the Fed first mentioned it might taper its bond buying program, interest rates soared. This put the brakes on the recovering housing market. People stopped looking for a home because they had no idea how high the rates would climb.
By September, the rate had hit 4.7 percent. While this isn’t a horrible interest rate compared to historical standards, it was bad considering just four months ago it was close to 3 percent.
Last week, Ben Bernanke came forward with the minutes from this month’s meeting, reporting that the taper is open ended. What this really means is there won’t be a taper this month – and probably not for many more months to come.
Interest rates reacted accordingly to this news. They inched lower to 4.13 on the day Bernanke made his announcement.
Before we delve into how awesome this is for home buyers, let’s take a look at the reason why the interest rates care about the Fed tapering.
Interest Rates and Tapering
In January of 2009, the Fed decided to purchase bonds, which were guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Their goal was to pour money into these bonds to help boost the housing market.
According to Bloomberg, the Fed bought $1.25 trillion in bonds in the first phase of the program, and it seems as though this hooked it; it wasn’t long before the Fed began a second round in 2010 and then a third round in 2012. By this point, it was buying $85 billion in long-term bonds per month. This included $40 billion in mortgage backed securities.
Now, when the Fed puts money in, homebuyers don’t have to put as much in. That’s why the interest rates declined. This was one of the main ideas behind the stimulus – to make buying a home much more feasible for people to boost a lagging housing market.
But there is a problem: everyone has become used to the low interest rates, so the slightest rise in them makes people run the other way. They don’t like to see rates close to 5 percent – even though that was considered a good rate just a few years ago. People have tasted the sweetness of those low interest rates, and they still want 3s and low 4s.
With the Fed feeding money into the stimulus for what analysts expect will be at least another four months, homebuyers are coming out of hiding. And they are finding there is still a supply of homes to choose from, which makes it a buyer’s market.
In addition, real estate values have increased. This has removed a substantial portion of negative equity, which keeps many homeowners away from foreclosure. And as prices continue to rise, more homeowners will be enticed to sell.
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More buyers are finding their way into the housing market. The U.S. unemployment rate is declining, and people are starting to repair the credit they damaged back when they had to foreclose.
There’s also a new trend with banks. Banks like TD Bank, Bank of America, and Wells Fargo are offering mortgages with only 5% down, as CNN reports. TD Bank takes it a step further by allowing 2% of the down payment come from a relative or third party, which means buyers would only have to fork over 3%.
These banks are practically giving people mortgages. Why? We could say they are trying to do their part in improving the housing market, but it’s really because they were hit with the slowdown this summer as well due to the increased interest rates.
Where the Housing Market Leaves Investors
Home prices are still rising, and they will continue to rise as the housing market improves. If you buy a home now, you will likely be able to sell it for more in the near future – especially since buyers are hungry to take advantage of the low interest rates and the ease of getting a mortgage.
If aren’t in a position to buy a home, you can still make out well by investing in stocks related to the housing market. Home lenders will see an influx in the coming months as more people seek mortgages. And homebuilders will be busy keeping up with the demand for homes, so stocks in construction and supplies will likely see an increase as well.
Home improvement stores such as Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are also doing well, and they are expected to continue to see increases in revenue throughout the housing recovery. Real estate investment trusts (REITs) are also good options for a housing market that’s improving day by day.
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