Tue. Oct 19th, 2021

U.S. home prices have risen at a record annual rate in recent months, driven in part by historically cheap credit, the absence of properties for sale and the hustle and bustle of homes for more space. families have fled to the suburbs during the pandemic.

Can the good times last when the Federal Reserve finally reduces the purchase of mortgage and Treasury bonds? It explains how mortgage rates and a less huge central bank footprint could affect the heated U.S. real estate market.

“The Fed is talking and thinking about it,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, on how the Federal Reserve could reduce the central bank’s bond purchase program by $ 120 billion of dollars a month.

But Jones also thinks tighter credit conditions, probably through higher lending rates as the Fed cuts its bond-buying program, could end up being a saving grace for today’s real estate market.

“Housing prices could certainly fall, after accelerating so quickly,” he said, noting that households were fighting over the few properties available to buy while navigating from home. “At some point,” he said, mortgage payments on high-priced homes “become unsustainable with people’s incomes.”

“But I don’t see a big real estate misfortune.”

How to pump the housing brakes

The central bank has maintained a major footprint in the mortgage market for more than a decade, but the worsening crisis of affordability in the U.S. real estate market led Fed officials to resort to the cold rope recently when they tried explain their ongoing large-scale asset purchases during the pandemic. recovery.

Fed officials in recent weeks have expressed some disagreement about the timing and pace of any reduction in their large-scale asset purchases.

The Fed Chairman of St. Louis, James Bullard, said Friday that the central bank should start curbing bond purchases this fall and end in March, saying it believes financial markets are “very well prepared” for the reduction in purchases.

During a week-long press conference, President Jerome Powell said reducing the likelihood would begin with mortgage-backed securities (MBS) and Treasury bonds at the same time, but also “the idea of ​​reducing” the mortgage exposure “at a slightly faster rate traction with some people.”

The blue line in the chart below traces the central bank’s balance sheet and the steep path to a $ 8.2 trillion balance sheet since 2020, when its efforts to support markets during the pandemic began, with the line red representing his Treasure TMUBMUSD10Y,
1.228%
holdings and green line your MBS. MBB,
+ 0.02%

The Fed has major cards in the MBS and Treasury markets

St. John’s Fed data Louis

As of July 29, the Fed held about 31% of the agency’s MBS market of about $ 7.8 trillion, or government-backed housing bonds.

“You could claim that the Fed owns nearly a third of the agency’s mortgage bond market and that it might make sense to loosen control,” Jones said, especially because Powell has downplayed a direct link between his MBS purchases and climb home.

It may seem like a distant memory now, but before the pandemic upheaval, that was precisely what the Fed was trying to do.

“Who would have thought,” said Paul Jablansky, head of fixed income at Guardian Life Insurance, that the United States would be in the middle of “one of the most sparkling housing markets in history,” following the extreme pandemic closures of last year they closed companies, jobs and national borders.

“Every now and then people ask, ‘Are we at the top?’ Said Jablansky, a 30-year veteran of the mortgage, and a broader, asset-backed bond market. “We’re out of the balance of our experience, so it’s very hard to say we’re at the top,” he told MarketWatch.

“I think house price inflation is going to have to slow down drastically. But perhaps the most important question is: can we see housing prices being negative? I think the Fed will work very, very hard to create a landing. soft in house prices “.

Schwab’s forecast has been for the Fed to start things down by reducing its monthly asset purchases by $ 15 billion to $ 105 billion. That would cut $ 10 billion from the current $ 80 billion monthly rate of Treasury purchases and $ 5 billion from its $ 40 billion monthly rate.

“So far, we haven’t changed that,” Jones told MarketWatch.

Although the Fed does not set long-term interest rates, its massive purchase of treasury aims to keep the limits on debt costs. Treasury yields also report the interest rate component of 30-year fixed-rate mortgages. So maybe, reducing both at once makes sense, Jones said.

Badly remembering the 2013 taper

Fed Chairman Powell he said Wednesday that the standard of “substantial progress” of the central bank for unemployment and inflation has not yet been met, although he stressed that he would like to see more progress in the labor market before facilitating support for monetary policy to the economy.

Powell has also frequently talked about the lessons learned from the 2013 market turmoil, the “conical rage” that rocked markets after the central bank began talking about the hole pullback as the economy went down. Cure of the Great Recession of 2008.

“What we need to remember,” Jablansky said, is that markets were sold in anticipation of shrinking, not the actual decline in asset purchases. “Later in the year [former Fed Chair Ben] Bernanke was talking, the Fed continued to buy assets and the amount of housing it provided to the economy increased. “

Historically, the only stretch where the Fed has actively withdrawn its support occurred between 2017 and 2019, following the controversial first foray into large-scale asset purchases to thaw credit markets after 2008.

“It’s very difficult to draw many conclusions from this short real period,” Jablansky said. “For us, the bottom line is that 2013 may be instructive, but the circumstances are really different.”

See: Why the Fed’s balance sheet is expected to exceed $ 9 trillion after it begins to cut its monthly asset purchases

Powell’s message has consistently been to preserve “maximum flexibility, but go very slowly,” said George Catrambone, chief trading officer of DWS Group’s asset manager.

Catrambone believes it may be the right strategy, given the uncertain outlook on inflation, evidenced by the recent rising cost of living, but also by the fact that many of our lives have changed due to the pandemic.

“We know a used car will cost no more than a new car forever,” Catrambone said. “Do I think the real estate market is slowing down? I could. But you really need an imbalance between supply and demand to decrease. This may take a while “.

Extreme forest fires, drought and other climate change shocks have been linked to $ 30 billion in real estate losses during the first half of 2021, putting more plots of land and U.S. homes at risk. While these issues were less common on the housing market in 2013, the pandemic also changed the whole notion of “what is safe” for many families.

“Migratory patterns are often catchy,” Catrambone said, about fleeing urban centers to the suburbs.

In addition, the delta variant that fuels a new wave of COVID-19 cases has led to stricter vaccination and masking policies, including Alphabet Inc., GOOG,
-0.97%
Facebook Inc. FB,
-0.56%
and others, but they also delayed the plans of many large companies to return staff to office buildings.

“This probably won’t help commercial real estate occupancy rates, as there are likely to be more people staying closer to home,” Catrambone said, but it probably adds to the already high psychological value. which is given to housing “.

After hitting record highs, the S&P 500 SPX index,
-0.54%,
Dow Jones Industrial Average DJIA,
-0.42%
the Nasdaq Composite Index COMP,
-0.71%
it closed Friday and the week went down, but it booked monthly gains.

In terms of US economic data, August kicks off with manufacturing and construction spending data, followed by motor vehicle sales, ADP employment and unemployment claims, but the main focus of the week will be the report monthly non-farm payroll Friday.

Read: Climate risk is affecting state and local governments

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