Prospective homebuyers' market outlook hinges on Yellen

Bloomberg NewsJanuary 2, 2014 

Adam Bregman, 28, a Florida attorney who lives with his mom, said he hopes 2014 is the year he finally buys a home of his own.

Bregman’s prospects probably will hinge mostly on one person: Janet Yellen.

Yellen, 67, who takes over as chairman of the Federal Reserve if the Senate confirms her in a vote scheduled for next week, will hold significant sway over the direction of the U.S. housing market in 2014. After last year’s jump in prices that rivaled gains during the housing boom, Yellen will guide the winding down of the Fed’s bond-buying program that influenced mortgage rates for five years.

If Yellen tapers too quickly, investors could panic, causing mortgage rates to surge, said Diane Swonk, chief economist of Mesirow Financial in Chicago and an adviser to the Federal Reserve Board. If the new chairwoman goes too slowly, low rates coupled with an improving economy will cause the housing market to overheat, Swonk said.

“Mortgage rates will decide when we buy a house and what kind we can get,” said Bregman, who has been living in his childhood home in Boca Raton for two years to save money for a down payment. “I’m hoping rates don’t spike up another percentage point, like they did in 2013.”

The average fixed rate on a 30-year mortgage was 4.48 percent last week, up from 3.35 percent in early May, according to Freddie Mac, the government-owned mortgage securitizer. Interest rates began rising after Fed Chairman Ben Bernanke, 60, told Congress he was preparing to reduce the bond-buying program.

The success of Bregman and other first-time buyers will largely determine the strength of the housing market this year, Swonk said. They have struggled to purchase property because of stiffer mortgage standards after the housing crash and a weak job market. The unemployment rate, at 7 percent as of November, hasn’t been below that figure since 2008.

The share of homes bought by first-timers fell to 28 percent in November from 30 percent at the beginning of 2013, according to the National Association of Realtors. During the decade ending in 2012, the average was about 40 percent.

“So far, first-time buyers have been missing from the housing recovery,” Swonk said. “They need to come into the market in greater numbers, because they have to buy properties before sellers can move up.”

Home prices probably will rise about 5.3 percent in 2014, half the pace of 2013, according to the Realtors association. Sales of existing homes will total 5.1 million in 2014, matching last year, the trade group predicts.

“Whether any of the housing forecasts are accurate depends on what Janet Yellen does, and no one really knows what that will be,” said Karl Case, co-founder of the S&P/Case-Shiller home-price index. “We’ve never seen an intervention in the market like the Fed has done, so we’ve never seen an unwinding.”

With Bernanke at the helm, the Fed began purchasing bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009. The Fed’s stated aim was to bolster the housing market by reducing financing costs. The program has helped to increase the Fed’s balance sheet to about $4.03 trillion. Mortgage securities make up about one-third of that total, giving the Fed ownership of $1 out of every $7 of U.S. mortgage debt.

The Fed announced Dec. 18 that it will trim its monthly bond purchases to $75 billion from $85 billion while reaffirming its stance to keep monetary policy “highly accommodative.”

Yellen said in her Nov. 14 confirmation hearing that she’ll maintain the bond-buying program until a “strong recovery” convinces her to end it. She didn’t provide details on how she might taper the program.

“The Fed under Yellen will continue to make purchases, but at a lower rate as the economy improves,” Case said. “If the economy stays on this growth path, housing will get enough help from an improving labor market to withstand a reasonable increase in mortgage rates.”

Case said there’s a danger of a rate spike if the Fed’s tightening isn’t done correctly.

“If that happens, your guess is as good as mine,” Case said.

News & Observer is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service