Economic Commentary for November 12th, 2013: Multiple Influences on Mortgage Rates

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There are many factors which affect mortgage rates, and we saw several of them over the past week. Important events took place concerning economic data, political actions and monetary policy. Despite the wide range of influences, however, a volatile week produced little net change in mortgage rates.

Investors have moved forward their expected timing for the Fed to begin to scale back its bond purchases. The current consensus outlook is that the Fed announcement about tapering is very close and could take place as soon as next week. The Fed’s primary conditions for tapering appear to have been met. The stronger than expected Employment Report released on Friday revealed healthy job gains in November. Over the past three months, the economy has added an average of 193K new jobs each month, up from around 150K per month over the summer. The Unemployment Rate declined to 7.0%, the lowest level since November 2008. Also important to the Fed, the level of uncertainty about fiscal policy has been reduced, as Congress is close to reaching a two-year budget deal.

Included in the interest rate paid on most mortgages is an amount which is passed to Fannie Mae, Freddie Mac and the FHA for these agencies to guarantee repayment of loans. This week the acting director of the agency that oversees Fannie Mae and Freddie Mac, Edward DeMarco, announced an increase in the amount Fannie and Freddie will charge to guarantee new loans (the g-fee). The increase will cause mortgage rates to be about 0.10% higher. It will soon affect rates on new loans, depending on the length of the lock period. Edward DeMarco is being replaced this week by a new director, Mel Watt. Director Watt will have the discretion to revise or even cancel the g-fee increase.

The next Fed meeting will take place on December 18 and likely will be a big market moving event. It’s even possible that the Fed will announce that it will begin to taper its bond purchases. Investors will also be watching the votes in the House and the Senate on the proposed budget deal. In addition, Retail Sales data, housing reports and inflation figures will be closely watched.

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