U.S. house prices have soared at a record annual rate in recent months, fueled in part by historically cheap credit, the lack of homes to sell, and the scramble for more space as families fled to the suburbs during the pandemic.
Can the good times continue when the Federal Reserve finally restricts mortgage and government bond purchases? Mortgage rates and a less gigantic central bank balance sheet could affect the heated US real estate market.
"The Fed is sure to talk and think about it," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, on how the Federal Reserve could cut the central bank's $ 120 billion monthly bond purchase program.
However, Jones also believes that tighter credit terms, likely through higher lending rates as the Fed expires its bond purchase program, could end up saving today's housing market.
"House prices could certainly pull back after such a rapid acceleration," she said, pointing to households grappling over the few properties available to buy while working from home. "At some point," she said, "high-priced home mortgage payments will become unsustainable with people's incomes."
"But I don't see a major housing debacle."
How to pump the brakes on the case
The central bank has had a strong presence in the mortgage market for more than a decade, but the worsening affordability crisis in the U.S. housing market recently put Fed officials on a tightrope as they tried to explain their ongoing large-scale bond purchases during the pandemic recovery.
Fed officials have expressed some disagreement over the past few weeks about the timing and pace of rolling back their large-scale asset purchases.
St. Louis Fed President James Bullard said Friday the central bank should slow its bond purchases this fall and close by March.
During a weekday news conference, Chairman Jerome Powell said that tapering would likely begin with mortgage-backed securities (MBS) and government bonds at the same time, but also "the idea of" reducing mortgage exposure a little faster "has some traction with some people".
The blue line in the chart below shows the central bank's balance sheet and the abrupt path to a balance sheet of $ 8.2 trillion since 2020 when its efforts to support the markets during the pandemic began, with the red line showing its Treasury TMUBMUSD10Y, 1.228% stocks and the green line represents its MBS. MBB, + 0.02%
Fed holds key cards in MBS and Treasury markets
St. Louis Fed data
On July 29, the Fed held approximately 31% of the $ 7.8 trillion MBS or home bond market with government support.
"You could argue that the Fed owns nearly a third of the agency's mortgage bond market and that it might make sense to loosen its grip," said Jones, especially since Powell has a direct link between his MBS purchases and rising house prices.
It may seem like a distant memory now, but before the pandemic upheaval was exactly what the Fed was trying to do.
"Who would have thought," said Paul Jablansky, Head of Fixed Income at Guardian Life Insurance, that the US would find itself in the middle of "one of the foaming property markets in history" after last year's extreme pandemic closings that saw companies shut down . Jobs and national borders.
"Occasionally people ask, are we at our peak?" Said Jablansky, a 30-year veteran of the mortgage and asset-backed and broader bond markets. "We're out of balance with our experience, so it's very hard to say we're at the peak," he told MarketWatch.
"I do think that house price inflation needs to slow down dramatically. But perhaps the biggest question is, can we see house prices turn negative? I think the Fed will work very, very hard to get a soft landing in house prices. "
Schwab's forecast is that the Fed will reduce its monthly security purchases by $ 15 billion to $ 105 billion. That would mean cutting $ 10 billion from its current monthly pace of $ 80 billion in Treasury purchases and $ 5 billion from its monthly pace of $ 40 billion in MBS.
"We haven't changed that so far," Jones told MarketWatch.
While the Fed does not set long-term interest rates, its bulk purchases of government bonds aim to contain borrowing costs. The yields on government bonds also flow into the interest component of 30-year fixed-rate mortgages. So maybe it makes sense to reduce both at the same time, Jones said.
I don't remember the 2013 taper
Fed Chairman Powell said on Wednesday that the central bank's "considerable further progress" had not yet been achieved, especially in terms of unemployment and inflation, but emphasized that it would like more progress on the labor market before loosening the monetary policy support for the economy.
Powell has also spoken frequently of the lessons he learned from the 2013 market turmoil, known as the "taper tantrum," which rocked markets after the central bank started talking about taking the punch bowl away as the economy pulled away from the Great recession of 2008 rebounded.
"What we need to remember," Jablansky said, is that markets sell out in anticipation of rejuvenation, not the actual decline in asset purchases. "Later in the year, the period [former Fed Chair Ben] Bernanke spoke of the fact that the Fed did indeed continue to buy assets and that the amount of shelter it made available to the economy actually increased. "
Historically, the only period the Fed actively withdrew its support was between 2017 and 2019, following its controversial first foray into large-scale asset purchases to thaw post-2008 credit markets.
"It is very difficult to draw many conclusions from this really short period of time," said Jablansky. "For us, the bottom line is that 2013 may be instructive, but the circumstances are very different."
See: Why the Fed's balance sheet is set to exceed $ 9 trillion after it begins cutting back on its monthly security purchases
Powell's message was consistently "to maintain maximum flexibility, but proceed very slowly," said George Catrambone, head of America trading at wealth manager DWS Group.
Catrambone believes this could be the right strategy given the uncertain inflation outlook evidenced by the recent rise in the cost of living, but also because many of our lives have changed significantly as a result of the pandemic.
"We know that a used car doesn't always cost more than a new car," said Catrambone. "Do I think the housing market is slowing down? It could. But you really need the supply and demand imbalance. This can take a while."
Extreme forest fires, droughts, and other tremors of climate change have been linked to $ 30 billion in property damage in the first half of 2021, while putting more land and US homes at risk. While these were less of a common theme in the housing market in 2013, the pandemic has also changed the whole idea of what is safe for many families.
"Migration patterns tend to be sticky," said Catrambone of the escape from the urban centers to the suburbs.
In addition, the Delta variant, fueling a new wave of COVID-19 cases, has resulted in stricter masking and vaccination policies, including at Alphabet Inc., Goog, -0.97% Facebook Inc. FB, -0.56 % and other, but also delayed, plans by many large companies to bring staff back to office buildings.
"This is unlikely to help with commercial property occupancy rates as more people are likely to be staying close to their homes," said Catrambone, but it likely adds to the already high "psychological value attached to housing."
After S&P 500 Index Hit SPX Record Highs, -0.54%,
Dow Jones Industrial Average DJIA, -0.42% and Nasdaq Composite Index COMP, -0.71% closed lower Friday and the week but posted monthly gains.
On the US economic data front, August starts with manufacturing and construction spending, followed by auto sales, ADP employment and jobless claims, but the main focus of the week will be Friday's monthly non-farm payroll report.
Read: Climate risk affects federal states and municipalities
source https://seapointrealtors.com/2021/07/31/home-prices-could-cool-when-the-fed-tapers-its-bond-buying-program-but-a-crisis-unlikely/
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