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the latest ANALYTICS Or ig i nat ion Rates Rising Too Fast? Some analysts wonder aloud if rising rates are dragging down the housing economy. Fed Continues Course The FOMC votes to keep the asset purchase program as is for foreseeable future. A the committee said it will wait for more evidence of sustainable progress before adjusting the pace of its $85 billion-per-month asset purchases, an initiative first undertaken last fall to keep interest rates down and maintain an accommodative financial environment. However, the FOMC left open the possibility of a taper in the future, asserting that "[a]sset purchases are not on a preset course" and saying future decisions about their pace will be based on the committee's economic outlook. The committee also maintained its strategy of keeping the range for the federal funds rate at 0 to 1/4 percent, anticipating the low range "will be appropriate at least as long as the unemployment rate remains above 6.5 percent" and as long as inflation projections are within the 2 percent goal. The committee voted almost unanimously to continue pursuing its action. The sole vote against was cast by Kansas City Fed President Esther George, who said she was "concerned that the continued high level of monetary accommodation increased the risk of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations." The M Report se c on da r y m a r k e t nalysts holding out for a sign that the Federal Reserve may soon taper its asset purchasing program will have to continue waiting. The Fed released recently the latest Federal Open Market Committee (FOMC) statement, revealing a generally cautious attitude among members as the economy struggles against headwinds. In its statement, the FOMC says information received since September "generally suggests that economic activity has continued to expand at a moderate pace"—a more uncertain statement than the one expressed in September. In the labor markets, the committee noted that "conditions have shown some further improvement," though the unemployment rate is still elevated. On the subject of housing, the FOMC noted growth has slowed in recent months; however, unlike the September statement, October's release does not cite rising mortgage rates as a concern. With Washington's troubles on the backburner for now, it remains to be seen what kind of trend interest rates will take on. Despite continued improvements and greater economic stability, a na ly t ic s "The bottom line is that, three years after activity began picking up and two years into the upturn in house prices, the U.S. housing recovery still faces a number of hurdles." s e r v ic i ng W hile maintaining As far as prices are concerned, that tight credit the lag between sales and price conditions and changes makes it hard to tell what rapid price the effects have been. However, gains present the greatest "[p]rice gains appear to be slowing threats to the housing recovery, anyway and, in time, the rise in Capital Economics is ready to mortgage interest rates may, at the acknowledge that rising mortgage margins, add to this slowdown." rates may provide more drag than There is some good news, the firm's analysts first thought. though. Heightened rates will Tracking mortgage applications raise lenders' return on new (as reported by the Mortgage loans, helping to fill the gap left Bankers Association) from May by the decline in refinancing and through September, Capital potentially leading to looser credit Economics determined that reficonditions. nancing activity has taken the biggest hit from the 120-basispoint climb in rates with a decline of 70 percent. While the decrease in refinance activity isn't necessarily reflective of changes in housing market demand, the 17 percent drop in purchase applications over the same period is another story. "[T]hat was enough to undo all — Paul Diggle, Capital Economics of the improvement in home purchase applications that previously appeared "The bottom line is that, three to be under way," property years after activity began picking economist Paul Diggle wrote in up and two years into the upturn the company's latest U.S. Housing in house prices, the U.S. housMarket Focus. "This has put a ing recovery still faces a number dent in hopes that mortgage-deof hurdles," Diggle concluded. pendent buyers are playing a big"But to our minds, tight credit ger role in the housing recovery." conditions, an over-reliance on Tracking sales, Diggle notes investment buyers, and overly numbers were up initially—an expected result as buyers rushed rapid price gains are all potento avoid further hikes—and then tially more serious challenges than down as the pipeline cleared. The higher mortgage interest rates." most recent data has been more He continued: "Nevertheless, encouraging, though he says those the steady rise in rates to date, and improvements have largely been the likelihood that rates will rise driven by investors and cash buyfurther still, is another reason to ers, groups that are immune to expect the pace of the U.S. houshigher mortgage interest rates. ing recovery to slow from here." | 51

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