One of the decision points that the Fed will encounter as it considers tapering its quantitative easing (QE) measures will be the relative strength of the housing market. One factor influencing this strength is mortgage rates. The interest rates on long-term (30-year) loans have risen above 4% on the back of the move to higher Treasury rates that we have seen since early May.
At the moment, we don’t see any signs that this backup in rates has affected the strength of the housing theme, which is driven in part by the increase in household formation of recent years.
We expect the Fed will be watching this trend closely, along with employment data.
If housing demand shows sensitivity to higher mortgage rates, we would expect the Fed to ease up on the tapering of QE measures.
More in: Fixed income