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Bernanke Giving Homebuyers Second Chance With Pledge: Mortgages

Photographer: Craig Warga/Bloomberg

A "For Sale" sign hangs in front of a townhouse in the Brooklyn borough of New York. Close

A "For Sale" sign hangs in front of a townhouse in the Brooklyn borough of New York.

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Photographer: Craig Warga/Bloomberg

A "For Sale" sign hangs in front of a townhouse in the Brooklyn borough of New York.

This was supposed to be the year that Herb Harrison found a newer, bigger home to replace his current house in Framingham, Massachusetts. Then, in May, mortgage rates began to rise and he put his hunt on hold.

“My wife and I looked at each other and said ‘no way,’” said Harrison, who works in information technology. “It was something we thought about when rates were at rock-bottom, but once the rates spiked, we decided to stay where we are.”

Now shoppers like the Harrisons are getting another chance, thanks to Federal Reserve Chairman Ben S. Bernanke. After five months of public speculation about when the Fed would end its housing stimulus sent mortgage costs to a two-year high in September, the U.S. central bank last week pledged a continuation of the bond buying responsible for last year’s all-time low 3.36 percent for a 30-year fixed loan. Interest rates may now hold at close to 4 percent through early next year, said Joel Naroff, president of Naroff Economic Advisors.

“People who were priced out of the market by the jump in rates are getting a do-over,” saidNaroff, based in in Holland, Pennsylvania. “Rates aren’t going back down into the low 3s, but we may see the high 3s and we’ll see those rates remain stable through at least February or March. That’s going to restore buyer confidence.”

The four-year economic expansion has been buttressed since early 2012 by a housing recovery that lifted construction and supported consumer spending. That rally was helped by borrowing costs that fell to a record low in December.

Rate Spike

Demand for properties began to weaken after Bernanke said in May that the Fed could slow the pace of its bond purchases. Speculation intensified in June and rates reacted with a surge that sent pending home sales tumbling 9 percent in the four months through September to the lowest level of 2013 while home affordability fell to a five-year low. Homebuilders, among the biggest beneficiaries of monetary stimulus, slipped 1.8 percent today in New York trading, according to an index of the companies. The measure has slumped 23 percent since a May peak.

Last week, the Fed policy-making board headed by Bernanke issued a statement saying “the recovery in the housing sector slowed” in recent months. That was a shift from its assessments in prior months when it said housing demand was strengthening, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

“It’s clear the Fed became concerned about housing over the last month, and that’s why it came out so firmly on the side of bond-buying,” Swonk said. “After months of talking about ending the program, the statement was crystal clear it would continue, open-ended.”

‘Stuck Buying’

The Fed might have jumped the gun with talk about tapering because of Bernanke’s desire to end the stimulus by the end of his final term in January, Swonk said. President Barack Obama has nominated Janet Yellen to replace Bernanke.

Reconsidering Homeownership

“Bernanke wanted to exit the stimulus before his goodbye, and now the Fed is in a no-man’s land where they’re stuck buying,” Swonk said. “For now, they can’t stop because of the market reaction.”

The Fed began purchasing bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 with the aim of bolstering the housing market by reducing financing costs. In that first phase of the stimulus, the Fed bought $1.25 trillion of the mortgage securities by the end of March 2010.

The month before the purchases began, the spread between the 10-year government bond yield and the average U.S. 30-year fixed mortgage rate had been about 3 percentage points, the widest since 1986, showing how investors who had little competition in the market were demanding higher payment for risk.

Three Rounds

The Fed announced a second round of purchases, known as QE2, for the second phase of quantitative easing, in November 2010, and a third round, QE3, in September 2012, with the Fed buying $85 billion of long-term bonds a month, including $40 billion of mortgage-backed securities. By then, the spread had dropped below 2 percent.

When the Fed began talk about tapering in May, rates were near last year’s record, and without the Fed’s comments they might have fallen even lower, said Christopher Sebald, who oversees $26 billion of assets, including mortgage bonds, as president of Advantus Capital Management.

“The housing and mortgage markets responded very poorly to the scare in May about tapering,” Sebald said. “The Fed doesn’t want to take that chance again until the economy is a lot stronger, so we saw this very clear statement the program will continue.”

Average Rates

Just before speculation grew in May that the Fed could reduce its bond-buying program, the average U.S. 30-year fixed mortgage rate was at a 2013 low of 3.4 percent. The rate peaked in the beginning of September at 4.7 percent, according to Bankrate Inc., based in Jacksonville, Florida.

The commitment last week to extend the program reassured the market, Sebald said. The average fixed rate fell to 4.13 percent the day the Fed made the announcement, the lowest since June, according to Bankrate.

The Fed is now expected to delay the first reduction of its bond-buying program until March, according to the median estimate in a Bloomberg survey of 30 economists conducted Oct. 17-18. Tapering will begin with Treasuries in March, and mortgages will follow “shortly after,” according to analysts at Goldman Sachs Group Inc. in a Nov. 1 report.

“I think if rates stay close to 4, we won’t feel locked in to staying where we are,” said Harrison, the Framingham homeowner. “It’s going to give us options we didn’t have a few months ago when rates had gone so much higher.”

The continued bond-buying will strengthen housing demand, said Fed Governor Jerome Powell in an Oct. 11 speech. He was one of the Fed policy makers who voted with Bernanke to continue the stimulus.

At some point, though, the housing market will have to function without support from the Fed, he said.

“‘Open ended’ does not mean unending,” he said.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net.

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