US Federal Reserve decides against cutting stimulus program
Despite the fact that the US Federal Reserve had initially indicated that it was looking to reduce the $85 billion a month stimulus program there was apparently an about-turn with decision time looming. As a consequence the US authorities will continue with the enormous stimulus program which has buoyed investors who were concerned that US interest rates would at some stage begin to move higher.
This initial enthusiasm for the Fed’s decision will no doubt be tempered in due course when investors take into account the fact US economic growth will be less than expected for 2013. It was the fragile nature of the US economy which apparently forced the Fed into a U-turn on initial plans.
How will this impact the US property market?
The fact that US base rates will remain at 0.25% for the foreseeable future will be a relief for those looking towards the mortgage arena – especially after the recent rise in money market rates. There was a growing concern that US mortgage rates would start to move higher if, as had been expected, the Federal Reserve followed-through with initial plans to cut the enormous stimulus program.
Quote from PropertyForum.com : “While the historic link between Canada and the USA continues to see billions of dollars invested in US property by Canadian investors, there is no doubt that China is now playing a pivotal role in the US property market.”
To emphasise what a very strange economic environment we live in today, the fact that US base rates will remain at 0.25% was cheered even though the reason was that the US economy is performing worse than expected. We can only begin to wonder what the impact will be when the US authorities eventually decide the economy can stand on its own two feet and the stimulus program is reduced or ended.
First-time buyers in the US
As we are starting to see in the UK, US first-time buyers are being priced out of many state property markets simply because there is insufficient property to cover demand. As a consequence there is more competition for US properties in general which is squeezing prices higher and higher. When you bear in mind that this situation for US first-time buyers is occurring in the depths of the worst economic recession in living history, will they ever be able to get back on the property ladder?
The UK government has decided to introduce an array of financial incentives for UK first-time buyers with one such move seeing the UK government guarantee a portion of their mortgage finance. While this was initially welcomed by UK first-time property buyers the fact is that in the short term it has increased competition within the property sector, pushed prices higher, more out of the reach of future first-time buyers than ever before!
Conclusion
The US property market has been performing admirably of late although there have been variations in property price increases across the various states. When the US Federal Reserve recently indicated the fiscal stimulus program would be reduced, we saw money market rates move higher with the expectation that mortgage rates would follow. As a consequence, the Federal Reserve’s surprise decision to maintain its current fiscal stimulus program will likely see a short-term dip in money market rates, allay fears that mortgage rates will move higher in the short term but what about the long-term?
The simple fact is that the fiscal stimulus program will remain for the foreseeable future because the US economy is not able to stand on its own two feet. Is this a reason for cheer?