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Fate of housing industry hangs on Yellen

| Thursday, Jan. 2, 2014, 12:01 a.m.

Adam Bregman, a 28-year-old Florida attorney who lives with his mom, said he hopes 2014 is the year he finally buys a home of his own.

Bregman's prospects will likely hinge mostly on one person: Janet Yellen.

Yellen, 67, who will take over as chairwoman of the Federal Reserve if the Senate confirms her in a vote scheduled for next week, will hold significant sway over the direction of the housing market in 2014. Following last year's jump in prices that rivaled gains during the housing boom, Yellen will guide the winding down of the Fed's bond-buying program that influenced mortgage rates for five years.

If Yellen tapers too quickly, investors could panic, causing mortgage rates to surge, said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago. If the new chairwoman goes too slowly, low rates coupled with an improving economy will cause the housing market to overheat, Swonk said.

“Mortgage rates will decide when we buy a house and what kind we can get,” said Bregman, who has been living in his childhood home in Boca Raton for two years to save money for a down payment. “I'm hoping rates don't spike up another percentage point, like they did in 2013.”

The average fixed rate on a 30-year mortgage was 4.48 percent last week, up from 3.35 percent in early May, according to Freddie Mac, the government-owned mortgage securitizer. Rates began rising after Fed Chairman Ben Bernanke told Congress he was preparing to reduce the bond-buying program.

The success of Bregman and other first-time buyers will largely determine the strength of the housing market this year, Swonk said. They have struggled to purchase property because of stiffer mortgage standards following the housing crash and a weak job market. The unemployment rate, at 7 percent as of November, hasn't been below that figure since 2008.

The share of homes bought by first-timers fell to 28 percent in November from 30 percent at the beginning of 2013, according to the National Association of Realtors. During the decade ending in 2012, the average was about 40 percent.

“So far, first-time buyers have been missing from the housing recovery,” Swonk said. “They need to come into the market in greater numbers because they have to buy properties before sellers can move up.”

Home prices probably will rise about 5.3 percent in 2014, half the pace of 2013, according to the Realtors association. Sales of existing homes will total 5.1 million in 2014, matching last year, the trade group predicts.

“Whether any of the housing forecasts are accurate depends on what Janet Yellen does, and no one really knows what that will be,” said Karl Case, co-founder of the S&P/Case-Shiller home-price index. “We've never seen an intervention in the market like the Fed has done, so we've never seen an unwinding.”

With Bernanke at the helm, the Fed began purchasing bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009. The Fed's stated aim was to bolster the housing market by reducing financing costs. The program has helped to increase the Fed's balance sheet to about $4.03 trillion. Mortgage securities make up about one third of that total, giving the Fed ownership of $1 of every $7 of mortgage debt in this country.

The Fed announced on Dec. 18 that it will trim its monthly bond purchases to $75 billion from $85 billion while reaffirming its stance to keep monetary policy “highly accommodative.”

Yellen, vice chairman of the Fed, was nominated by President Obama in October to lead the central bank after Bernanke's eight-year run as chairman.

“She'll probably continue on Ben's path,” Case said.

Yellen has broken with Bernanke in the past, however. At a 2007 Fed meeting, Bernanke dismissed the danger posed by rising mortgage defaults, saying “the economy looks to be healthy.”

Yellen, a former University of California at Berkeley professor of economics, voiced the opposite opinion.

“The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst,” she said, according to a transcript.

Yellen said in her Nov. 14 confirmation hearing that she'll maintain the bond-buying program until a “strong recovery” convinces her to end it. She didn't provide details on how she might taper the program.

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