Taper Timing

It was a volatile week for mortgage rates. The FOMC Minutes suggested that the Fed will begin to taper its bond purchases in the near future as expected, but a surprising decline in the New Home Sales data made that outcome less certain. After the offsetting influences, mortgage rates ended the week with little change.

The FOMC Minutes from the July 31 Fed meeting were released on Wednesday, but they did little to remove the uncertainty about when the Fed will begin to scale back its bond purchase program. The main takeaway from the Minutes is that Fed officials were split at the meeting about the timing for the taper to begin. Fed officials agree that the decision should be based on the performance of the economy, but they diverge on what constitutes sufficient strength. Bottom line, though, is that there was nothing in the Minutes to contradict investor expectations that the Fed will begin to taper in September or October, and mortgage rates rose after the release of the Minutes.

Friday's New Home Sales report caught investors by surprise. Data released earlier in the week showed that July Existing Home Sales increased 7% from June and were 17% higher than one year. This led investors to believe that the solid improvement seen in the housing sector this year would continue. However, July New Home Sales showed a decline of 13% from June. Existing Home Sales, which cover roughly 90% of home sales, are based on closings, while New Home Sales measure signed contracts. As such, New Home Sales reflect more current economic conditions than Existing Home Sales. Several Fed officials have expressed concerns that rising rates would slow the pace of economic growth. The decline in New Home Sales provides clear support that these concerns are justified. The question is whether the data will be enough to cause the Fed to hold off longer before tapering its bond purchases. The reaction from investors reflected the belief that tapering may be farther away, as mortgage rates improved after the release of the report.