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Home price appreciation slowed as interest rates rose

Housing, one of the bright spots of the current economic recovery, has continued to show price gains in 2013, but the pace of appreciation has fallen off in recent months.

The jump in interest rates that began during the spring has had a significant impact on mortgage rates. While rates are still at historically low levels, they have risen abruptly since May.

The pace of gains reflected in the FHFA House Price Index was strongest in March of this year.

Price appreciation might be easing as higher mortgage rates put upward pressure on anticipated monthly payments for borrowers, making them less willing to pay higher home prices.

The House Price Index is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac, which are overseen by the FHFA.

For investors, flexibility in mortgage strategies remains beneficial

The uncertain trends in mortgage rates and homebuying activity call for flexibility in fixed-income strategies involving mortgage-backed securities.

"As interest rates rose, there was a declining likelihood that the mortgages underlying our CMO holdings would be refinanced," stated Bill Kohli, a portfolio manager of Putnam Absolute Return Funds. "One of our diverse strategies seeks returns from mortgage prepayment risk and includes positions in interest-only collateralized mortgage obligations [IO CMOs], which can benefit when refinancings activity declines."

Putnam Absolute Return Funds have the flexibility to invest in a wide range of strategies without the constraints of traditional index benchmarks.

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