Fed taper in 2014 could put US housing recovery at risk, says DBS economist

The United States Federal Reserve's decision on pulling back its monetary stimulus may have a profound impact on its housing sector and the world markets next year, according to DBS.

Its chief economist David Carbon told a briefing today that if Fed tapering occurs, the US housing market is most at risk of seeing negative results.

He noted that when the Fed started talking about tapering earlier this year, mortgage applications fell by 15 per cent since April this year.

Any actual tapering, said Mr Carbon, could cause mortgage applications, sales, construction and prices to drop.

That's because the Fed is buying US$40 billion worth of housing bonds every month as part of its US$85 billion monthly bond-buying programme to spur the economy.

"This is what textbooks would tell you would happen: if the Fed stops buying all these stuff, prices would fall, construction would fall, sales would fall," Mr Carbon added.

If the housing market starts to fall apart, that could cause more uncertainty in the global stock markets as investors question if the Fed would halt the tapering process or bring it back up.

Mr Carbon forecasts that the Fed will likely start to taper in April, and that economic growth in the US may come in at 2 per cent in 2014, up from an estimated 1.6 per cent this year.