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ISSUE 4 | MARCH 2017

HOUSING MARKET
PERSPECTIVES
On the Level with Bill Emmons

Could Housing Markets Face
Another “Taper Tantrum”
Moment?

The Taper Tantrum of 2013 and the
Housing Market Slowdown
Comments by former Federal
Reserve Chairman Ben Bernanke in

assistant vice president and
economist at the Federal
Reserve Bank of St. Louis
and the senior economic
adviser for the Bank’s
Center for Household
Financial Stability.

FIGURE 1

Change in 30-Year Mortgage Rate and Household Income Growth Rate
1

Percentage points

D

uring the summer of 2013, rising
mortgage rates associated with
the so-called “taper tantrum” started
to pressure the housing markets.
While housing starts, home sales and
house prices generally grew more
slowly or declined through the end
of 2013, this did not lead to a fullfledged housing downturn or a significant economic slump.
While still historically low, mortgage rates have been on the rise again
in recent months. However, at least
so far, they are rising at a somewhat
slower pace than they did in the
second half of 2013. On the other
hand, household income growth has
dropped in recent months. In addition, house prices and rents, having
increased strongly for several years,
now appear more vulnerable to a
correction than they did in 2013. Will
housing markets weaken in 2017 as
they did during the taper tantrum of
2013, and will the economy escape
relatively unharmed again this time?

Bill Emmons is an

0

–1

–2

–3
May 2013

June
(taper
tantrum
begins)

July

August

September

October

Mortgage rate

November

December

Income growth

SOURCES: Wall Street Journal, Bureau of Economic Analysis
NOTE: Mortgage rate is the monthly average of daily rates for 30-year fixed-rate mortgages. Income is the
three-month moving average of inflation-adjusted per-capita disposable personal income. The figure shows
cumulative changes since May 2013 in the level of the mortgage rate and cumulative change in the
year-over-year growth rate of income in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

June 2013 about the potential for
tighter monetary policy in the near
future triggered a sharp increase in
long-term interest rates, including
fixed-rate mortgages. This became
known as the “taper tantrum.” Figure 1
shows an almost one percentage point
increase in the 30-year fixed mortgage
rate between May and September of
2013. At the same time, household
1

income growth was slowing (i.e., was
growing at successively slower rates
from one month to the next). This
combination suggests that financial
markets may have reacted more to
Bernanke’s comments than to signs of
a strengthening economy. The result
was a financial shock to housing and
other interest-rate sensitive parts of
the economy.

Will Housing Markets Follow the Same
Pattern in 2017?
Virtually all long-term interest
rates increased in late 2016 and early
2017. Market commentators point to
the outcome of the November 2016
election and a widely held view that
fiscal policy changes may occur in
2017, raising economic growth or
inflation, at least temporarily. At the
same time, monetary policy is becoming more restrictive, which also could
lift longer-term interest rates. At its
March 2017 meeting, the Federal
Open Market Committee raised its
federal funds rate target by 0.25 percent to a range of 0.75 percent to

FIGURE 2

Change in Year-Over-Year Growth Rates
10

Percentage points

0
–10
–20
–30
–40
–50
–60
May 2013

June
(taper
tantrum
begins)

July

Housing starts

August

September

Pending home sales

October

November

December

Mortgage applications

SOURCES: Census Bureau, National Association of Realtors, Mortgage Bankers Association.
NOTE: All series are seasonally adjusted. Housing starts and pending home sales are annualized number of
housing units. Mortgage applications include both home-purchase and refinance transactions; the applications
index equals 100 in the week ending Mar. 16, 1990. The figure shows cumulative changes in the year-over-year
growth rates of each series in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

FIGURE 3

Change in Excess Housing Inflation Rates
1

Percentage points

Several housing market indicators
reacted strongly to this rise in mortgage rates. Figure 2 shows that housing starts, home sales and mortgage
applications—which include both
home purchase and refinancing
transactions—slowed sharply through
the end of that year. By October, the
year-over-year growth rate of housing starts had declined 30 percentage
points from May. By December,
home sales growth was about
15 percentage points lower than
before the taper tantrum. The growth
rate of mortgage applications had
declined by almost 60 percentage
points by the end of the year.
House prices and the month-tomonth cost of shelter—including both
the rent paid by apartment dwellers
and a measure of “implicit rent” that
represents the cost of owning and
occupying one’s own house, termed
“owners’ equivalent rent”—also
seemed to react modestly to higher
mortgage rates. Figure 3 shows that,
relative to price trends that were in
place in May of 2013, both house
prices and the cost of shelter rose a bit
more slowly for a brief period. House
prices also rose more slowly.

0

–1

–2
May 2013

June
(taper
tantrum
begins)

July

August

September

FHFA purchase-only house-price index

October

November

December

Shelter-cost inflation

SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics.
NOTE: All series are seasonally adjusted. Excess FHFA inflation is calculated by subtracting the year-over-year
growth rate of the all-items consumer price index (CPI) from the year-over-year growth rate of the FHFA
purchase-only house-price index. Excess shelter inflation is calculated by subtracting the year-over-year growth
rate of the all-items CPI from the year-over-year growth rate of the CPI shelter index. The figure shows
cumulative changes since May 2013 in year-over-year growth rates of each measure in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

2

FIGURE 4

Change in 30-Year Mortgage Rate and Household Income Growth Rate

Percentage points

1

0

–1

–2
Oct. 2016

November
(election)

December

Mortgage rate

Mortgage rates have increased less
since the November election than
they did during the taper tantrum.
However, the housing recovery is at a
more advanced stage now and may be
more vulnerable to a correction. The
strength of the overall economy also
is unclear, as some forecasts of firstquarter GDP growth have recently
declined below one percent.2 Whether

February

March

April

May

Income growth

NOTE: Mortgage rate is the monthly average of daily rates for 30-year fixed-rate mortgages. Income is the
three-month moving average of inflation-adjusted per-capita disposable personal income. The figure shows
cumulative changes since October 2016 in the level of the mortgage rate and cumulative change in the
year-over-year growth rate of income in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

FIGURE 5

Change in Year-over-Year Growth Rates
10
0
–10
–20
–30
–40
–50
–60
Oct. 2016

November
(election)

December

Housing starts

Cautious Housing Outlook
is Warranted

January

SOURCES: Wall Street Journal, Bureau of Economic Analysis

Percentage points

1 percent, with the potential for
future gradual increases this year if
the economy performs in line with
the FOMC’s forecasts.
Figure 4 shows that mortgage rates
have increased by more than one half
of one percent through the first four
post-election months, somewhat less
than during the taper tantrum. As in
2013, a weakening trend in household
income suggests that higher mortgage
rates likely have more to do with
anticipated policy changes than tangible signs of a stronger economy.
The growth rates of housing starts
and home sales have declined in
recent months, according to Figure 5.
Mortgage applications have also
slowed. These recent changes are
similar to those seen during the
taper tantrum.
In one respect, housing markets
may be more vulnerable to higher
mortgage rates now than they were
in 2013. House prices and apartment
rents have increased strongly in recent
years, rising faster than household
incomes in some parts of the country.1
Figure 6 shows house prices, as well
as the cost of shelter, appear to have
slowed noticeably relative to their
recent trends. Compared to overall
inflation, housing-related measures
of price pressures have decreased
recently much more than they did
during the taper tantrum.

January

February

Pending home sales

March

April

May

Mortgage applications

SOURCES: Census Bureau, National Association of Realtors, Mortgage Bankers Association.
NOTE: All series are seasonally adjusted. Housing starts and pending home sales are annualized number of
housing units. Mortgage applications include both home-purchase and refinance transactions; the applications
index equals 100 in the week ending Mar. 16, 1990. The figure shows cumulative changes in the year-over-year
growth rates of each series in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

3

higher mortgage rates will cause housing markets to falter in 2017 is still an
open question.

FIGURE 6

Change in Excess Housing Inflation Rates
1

1 See On the Level, Issue 2.
2 See daily updates of the Federal Reserve
Bank of Atlanta’s GDPNow forecast.

Percentage points

ENDNOTES
0

–1

–2
Oct. 2016

November
(election)

December

January

February

FHFA purchase-only house-price index

March

April

May

Shelter-cost inflation

SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics.
NOTE: All series are seasonally adjusted. Excess FHFA inflation is calculated by subtracting the year-over-year
growth rate of the all-items consumer price index (CPI) from the year-over-year growth rate of the FHFA
purchase-only house-price index. Excess shelter inflation is calculated by subtracting the year-over-year
growth rate of the all-items CPI from the year-over-year growth rate of the CPI shelter index. The figure shows
cumulative changes since October 2016 in year-over-year growth rates of of each measure in percentage points.
FEDERAL RESERVE BANK OF ST. LOUIS

4