The Federal Reserve could begin withdrawing unconventional life support for the US economy as early as next week. It raises questions anew, especially for the housing sector, about what happens when an era of cheap borrowing costs comes to a close.
The Fed meets for two days this week, and its Wednesday (US time) statement is expected by many on Wall Street to include the first tapering back of its purchases of $US85 billion-a-month in government and mortgage bonds, underway since December 2012.
Economists and financial analysts have debated when the taper should begin, but most think it'll happen soon, because the economy keeps showing slow but steady improvement.
Fear of the taper, however, has sent the rate on a 30-year fixed-rate mortgage upward by more than a percentage point, to a national average of about 4.57 per cent.
If mortgage rates go too high, it could stop the housing recovery in its tracks. That's problematic, since falling home prices were the catalyst of the near-meltdown of the financial system in 2008.
For now, analysts aren't too concerned about a freeze in home purchases after the tapering begins and rates rise.
"In the early 1980s, we had mortgage rates in the teens and the housing market was depressed ... and a couple of years later, housing boomed again," said Patrick Newport, an economist specialising in housing for forecaster IHS Global Insight.
"I think people realise that these (very low) rates we're seeing are very transitory and we'll never see them again in our lifetime."
The average rate on a 30-year fixed-rate mortgage last year was an unheard of 3.66 per cent, and 4.26 per cent from 2010 through 2012. It's very low by historical standards. During the 1980s, the average rate over the decade for a 30-year fixed mortgage was 11.70 per cent. In the 1990s, it averaged 8.12 per cent.
Newport expects the average rate at the end of this year to be around 4.54 per cent for a 30-year fixed-rate loan, climbing to 4.68 per cent by the end of next year and 5.16 per cent at the end of 2015. The National Association of Realtors projects about 4.2 per cent this year, 5.1 per cent next year and about 5.5 per cent in 2015.
"So, that's a large increase in mortgage rates," said Jed Smith, managing director of quantitative research for the realtors' group.
"If that occurs, obviously, some people will be priced out of the market. But we don't think that will have a tremendous effect, because people bought plenty of houses when interest rates were well beyond six per cent."
The industry group, said Smith, is less concerned with rising rates than it is with overly tight lending standards that are preventing people with relatively good credit from obtaining home loans.
"If we got back to normal credit standards, we might see somewhere in the neighbourhood of half a million additional home sales," said Smith, saying people who could get a loan in 2001 can't get one today.
"Lower-credit buyers are being shut out of the market."
So, if housing is still recovering, why is the Fed removing support for the economy now?
The annual rate of economic growth from April to June was recently revised upward to 2.5 per cent, the unemployment rate has been dropping, and employers are adding jobs at a monthly pace around 180,000 this year.
During normal times, those would signal growth and could lead to higher interest rates if the Fed feared the economy was overheating. But these aren't normal times.
The federal funds rate has been anchored below 0.25 per cent since December 2008. With little room to influence the economy by conventional means, the Fed has in three separate efforts purchased government and mortgage bonds to spur business activity. It's called quantitative easing, and the idea is to drive down the rate of return on a longer-term bond, thus forcing investors to chase better returns in the stock market or elsewhere.
Traders have become so used to the support that they fear what might happen as the Fed takes its foot off the accelerator and a sugar high gives way to more volatility in bond prices. Few economists expect the Fed to actually begin raising its benchmark interest rate before the middle of 2015, but the taper still means less support just as the housing sector seems to finally be rebounding.