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JAN 8, 2014 4:46pm ET

Fed Surprised Higher Rates Slowed Housing Recovery

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Federal Reserve officials didn’t expect higher mortgage rates would be such a drag on the housing market during the second half of last year.

Housing activity slowed in recent months and lenders remain “reluctant to lend to borrowers with less-than-pristine credit,” according to the minutes of the December meeting of the Federal Open Market Committee.

“The increase in mortgage rates since the spring was having a greater effect on the housing sector market than anticipated earlier.” Going forward, Fed officials expect mortgage rates will “remain relatively favorable.”

At the December meeting, FOMC members decided to start tapering and slowly reduce their monthly purchases of Treasury securities and agency MBS.

However, the Federal Reserve’s portfolio of long-term securities remains sizeable and will be increasing. These holdings will maintain “downward pressure on longer-term interest rates and support mortgage markets,” according to the FOMC minutes released Wednesday.

The Fed officials also expect rising home values will reduce the number of underwater borrowers and rising consumer confidence and income will support demand for housing.

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