Change Is on the Way

The most noteworthy change in 2014 is the confirmation of a new Federal Reserve chairperson. This past Monday it was made official: Janet Yellen now chairs the Federal Reserve.

In the course of a regular workday, few of us give the Federal Reserve much thought. But the Fed does matter; its policies are very influential to housing and credit markets, and to the economy as a whole. So the lead question is, is the new boss much different than the old boss?

For the immediate future the answer is “no.” Everyone is aware that the Fed under the old regime leader, Ben Bernanke, was foreshadowing a tapering, which came to pass. Starting this month, the Fed will purchase $75 billion in Treasury notes and bonds and mortgage-backed securities instead of $85 billion. We don't expect a further reduction until the unemployment rate falls below 7% and stays there.

At the same time, personal consumption expenditures (PCE) remain sedate, running at 1.2% on an annualized basis. PCE is the Fed's preferred measure of inflation, and it would like to see PCE running at 2% annually instead of 1.2%. Therefore, we don't expect the Fed to announce any rate changes, possibly until 2015.

So the Federal Reserve has changed chairpersons, but its current policies are unlikely to change.

With that said, we still see changes in the mortgage market. We see rates rising, to be specific. Even if the Fed wants to hold interest rates low, it can't mandate the rate at which market participants lend. Markets are anticipatory, and they are anticipating economic growth, which is why the yield on the 10-year Treasury note – a leading proxy for the 30-year fixed-rate mortgage – is now hovering at 3%.

This is why we expect a change in mortgage lending rates; “change” being a euphemism for higher mortgage rates in 2014.

A slowdown in home-price appreciation is another looming change. Admittedly, we've been talking about a price slowdown for some time, and yet the data from the major home-price aggregators has contradicted us. Are our eyes lying?

It's appearing less likely. The latest price data from Trulia show the year-over-year increase in asking prices slowed for the first time in nearly two years. Asking prices rose 0.4% month over month in December, and that translates to an 11.9% year-over-year gain. But in November the year-over-year gain was 12.2%.

2014 won't be a repeat of 2013, and that's a good thing. Yes, mortgages won't be quite as affordable and slowing home-price growth won't immediately lift as many homeowners into positive equity, but these negatives will be offset by big-picture gains in job growth and more economic activity – two themes we've been banging the drum on for the past six months.

Courtesy of Jessica Regan.

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