By: Fred Arnold
Well we all know what hit the fan this week after the Fed made their market announcement about the future of interest rates. Although the Fed did not change a thing in regard to monetary policy, the markets reacted as if the sky was falling and both the bond and stock market tanked for 2 days straight.
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On Wednesday the Fed Open Market Committee announced that as the economy continues to improve they will begin rolling back their stimulus program. They estimated that at the current rate of improvement that the tapering of the stimulus program MAY begin towards the end of the year. You will notice that I capitalized the word “may” because even though the Fed did not give a definitive time frame for action, the markets acted as if the tapering was happening today.
The sharp simultaneous declines in both markets is unusual but not surprising. The stock market dropped over 500 points in 2 days since the Fed report because investors believe that when the government slows down the stimulus program the economy will suffer. Some investors believe that the Fed withdrawal will push the economy back into a recession. “I believe this is a good investment in the next 3-5 years.”
Bond market investors know that the Fed has been keeping interest rates artificially low. When the Fed reduces their bond buying the price on bonds will drop eating away at the value of the investor’s bond holdings. To minimize losses bond investors sold off big portions of their holdings which rapidly drove bond yields higher. Rates have been rising over the last couple of weeks based on expectations of the Fed’s message on Wednesday. Even though the Fed did not announce any changes in monetary policy, the mere hint that things will change in the future (which everyone knows was coming) sent investors scrambling. Because of speculation on the future of Fed policy, mortgage rates have increased approximately 3/4% from their record lows.
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On the positive side, housing reports continue to show continued improvement. Three important reports released this week, The Housing Market Index, Housing Starts, and Existing Home Sales all show significant improvement in the real estate market.
Housing starts for the month of May increased 6.8% after plunging 14.8% the prior month. Existing home sales surged 4.2% and are 12.9% above a year ago. The Housing Market Index released by home builders show a significant increase in builder optimism. Overall housing activity remains at subdued levels in part due to a lack of inventory. However, as existing homeowners hear more and more about the improving real estate market it is likely that more properties will come up for sale which will bode well for increased real estate activity in the coming months. More housing reports are on tap for next week. These reports are expected to follow this week’s reports and show significant continued improvement.
Market moving reports for next week are:
- Tuesday June 25th 2013 New Home Sales and Case-Shiller Home Value Index
- Wednesday June 26th 2013 MBA Applications and GDP
- Thursday June 27th 2013 Jobless Claims and Pending Home Sales
As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate information. I welcome the opportunity to serve you in any way I possibly can. Please feel free to reach me at 661-505-4300.
Source: Santa Clarita News