Weekly Economic Summary 01-04-2013

What's ahead in 2013?
Homeowners and homebuyers have a lot to keep track of as we head into 2013. Here’s a quick overview of the top stories to watch over the next few months.

The Fed
In its final meeting of 2012, the Fed confirmed that it would continue the third round of its bond buying strategy (known as Quantitative Easing or QE3). It also announced that it will begin a fourth round of Quantitative Easing in January.

What surprised the markets was the Fed's decision to tie the Fed Funds Rate (the rate banks charge each other for lending money overnight) to the unemployment rate. Instead of keeping with its plan of maintaining low rates until "at least mid-2015," now the Fed is going to hold the Fed Funds Rate steady as "long as the unemployment rate remains above 6.5%."

One of the biggest takeaways from this decision is that the Fed may be more tolerant of a rise in inflation. Lower unemployment would mean that the economy is gaining some momentum, thanks in part to the stimulus programs like QE3 that are currently underway, and inflation could easily trend higher in an improving economy. Keep in mind, inflation has a negative impact on bonds and therefore, on home loan rates.

Recent Producer Price Index and Consumer Price Index Reports have shown that inflation at the wholesale and consumer levels respectively remains moderate. However, when inflation manifests, it tends to do so quickly. This is a key area to keep a close eye on in the weeks and months ahead.

Fiscal Cliff
As we head into 2013, tax cuts for individuals and various tax breaks for businesses are due to expire, taxes pertaining to President Obama’s health care law will begin, spending cuts enacted by Congress as part of the debt ceiling deal of 2011 will go into effect, and long-term jobless benefits are due to expire. The Congressional Budget Office (CBO) estimates that if all of these items occur, it could take an estimated $600 billion out of the U.S. economy in 2013. This is the fiscal cliff we’re possibly heading toward.

While Congress and the President have been working toward a resolution, the uncertainty in the U.S., combined with continued uncertainty surrounding the debt crisis in Europe, has benefitted our bond market, as investors see our bonds as a safe place for their money. And since home loan rates are tied to mortgage bonds, they have also benefitted. As of this writing, a final agreement on these issues has yet to be reached. But even if an agreement is reached, the Fed notes the economy will continue to expand at only a moderate pace for the foreseeable future.
Bottom Line
Home loan rates remain near historic lows, making now a great time to purchase or refinance a home.

Author Bio: Rob Alley earned a bachelors degree at Virginia Tech, in Blacksburg, VA in Biology. Rob Alley has been licensed for 6 years, he and his team of 4 agents consults with homeowners regarding Real Estate transactions and speciliazes in listing and selling Central Virginia Real Estate - Charlottesville, Louisa, Orange, Lynchburg, Nelson, Fluvanna, Amherst, Bedford, Campbell, Waynesboro and Augusta. Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
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