Tapering, But Not Tinkering.
In your haste to finish up all of your holiday shopping and get those last minute cards out, you may not have noticed that the Federal Reserve concluded its winter meetings yesterday, and announced some key changes to its stimulus plan as we head into 2014. In a move that was widely anticipated, the Fed announced that it will begin to pare back its ongoing massive purchases of government bonds, treasury Bonds, and mortgage-backed securities in 2014. The USA Today has a great summary of the details of the meetings, and how the Fed plans to proceed later in the year.
As the economy continues to strengthen from the Great Recession of 2008, it has always been expected that the Fed would start to remove the training wheels from its stimulus plan, as key indicators showed that the economic recovery finally had some legs. It was really not a matter of “if”, but rather “when”. With the stock market climbing to new highs virtually every day, and unemployment now below the target of 7%, the Fed used this opportunity to start the process of cautiously extracting itself from its “easy money” policy.
Rates To Remain Low.
The big news for the real estate market, aside from the fact that the Fed will spend $5B fewer each month on mortgage-backed securities, is that they have decided to keep their benchmark short-term interest rates near zero, even though they had previously indicated that they may alter that policy once the nationwide unemployment rate dropped below 7%. As part of yesterday’s announcement, they indicated that they may keep the zero-interest policy in place even after the unemployment rate drops below 6.5%.
This news should bode well for the local real estate market, at least for the first part of 2014. Even though mortgage interest rates have inched upward over the past 12 months, they are still near historic lows — and the Fed’s continued position should remove any incentive (aka, excuse) for banks to increase rates on conforming and high-balance conforming loans stable for the near future.
The cautious approach by the Federal Reserve seems somewhat counter-intuitive when you consider the blistering pace at which the Silicon Valley economy (and housing market) is growing. But our perception of the economic health of the entire country is understandably somewhat distorted from our perch inside one of the hottest micro-economies in the entire world. The rest of the country is simply not growing anywhere near that fast.
So the bottom line is that the local economy will simply continue to reap the benefits from the Fed’s conservative position. And this in turn will keep the fire stoked underneath what is already a white-hot San Carlos real estate market — at least for a while. Because while the decision to keep rates unchanged is good news in the near term, a line has definitely been drawn in the sand by the Fed that this gravy train will not go on forever.
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