Did the Federal Reserve jump the gun? The day after the Fed announced the long-expected reduction in its economic stimulus program, there were some major signs that the economy, and the housing market in particular may not be doing as well as expected.
The Fed announced Wednesday that it would be scaling back its bond buying program by $10 billion a month in January, down from its current level of $85 billion. The program has been one of the Fed's key tools in keeping interest rates low over the past four years as a way of stimulating economic activity.
Home sales down, unemployment up
However, that was immediately followed today by a report from the National Association of Realtors that existing homes sales in November posted their first annual decline in 29 straight months, dropping 1.2 percent from their level of 12 months before and with a 4.2 percent monthly decline from their October level.
In addition, the Labor Department reported Thursday that initial claims for state unemployment benefits hit their highest level since March last week, jumping 10,000 to 379,000.
On top of that, the Mortgage Bankers Association announced on Wednesday that mortgage applications last week fell to their lowest level in a dozen years, pushed by rising mortgage rates in anticipation of the Fed's announcement.
Rate increases appear limited
Early indications are that mortgage rates rose only modestly following the Fed's announcement of its decision, which calls for a smaller reduction than many analysts expected. There was some increase in rates over the past week in anticipation of the Fed announcement, with Freddie Mac today reporting a 0.05 percentage point increase in 30-year rates over the past seven days.
Overall, it appears that many lenders were anticipating the Fed's decision and had already priced their loans accordingly.
Despite today's economic news, many analysts remain upbeat about the state of the economy. Despite the rise in unemployment claims, other indicators show that job growth continues to increase, and the unemployment jump could be a temporary seasonal blip.
Meanwhile, the fundamentals of the housing market are still regarded as strong, though rising rates and prices have put a crimp in sales at present. However, the combination of pent-up demand and interest rates that are still low by historic standards are expected to continue to feed increases in home sales over the next two years.