The Fed has played a major role in consumer mortgage rates and changes over the past decade.
Back in 2008, he began buying hundreds of billions in mortgage-backed securities (MBS). This was known as quantitative easing, or QE for short.
The goal was to lower interest rates and increase the money supply. Doing so would boost economic activity aka credit and help us get out of the Great Recession.
But such a plan had consequences – namely something called inflation.
The Fed also knew it could not hold these assets forever, but how would they unload without spooking the markets?
Quantitative Easing gave rise to hyperinflation
Fed conducted four rounds quantitative easingThat included buying both MBS and US Treasuries.
The last round of QE was extended till 2020 as the COVID-19 pandemic brought the world economy into disarray.
In the process, Mortgage rates hit all-time low, According to Freddie Mac, the 30-year fixed term declined as low as 2.65% during the week ending January 7, 2021.
And on July 29, 2021, the 15-year fixed rate drops to 2.10%. These low rates were unprecedented.
They were so cheap they caused a frenzy in the housing market House prices rising by almost 50% Late 2019 to mid 2022.
Clearly this was an unhealthy development, and a symptom of easy money.
Fed finally takes action to cool housing market
the feds realized they had a problem of inflation, They also realized that the demand for housing had gone completely out of control.
People were buying homes at any cost, thanks to the record low mortgage rates on offer.
It was not simply an issue of housing supply, as some pointed out. This meant that he had the power to cool down the overheated housing market, simply by reversing course.
Once he finally did notice, quantitative tightening (Qt) was implemented in mid-2022. It works in the exact opposite way to Qi.
Instead of buying, they are allowing these securities to be written off. And that means unloading Treasuries and MBS, albeit at a reasonable rate with caps.
Without a large buyer of MBS, supply increases, bond prices fall, yields rise, and consumer mortgage rates rise.
No one could have guessed how far he would go in such a short span of time. That too was unprecedented.
Mortgage rates essentially doubled in one year, the first time this has happened on record.
According to Freddie Mac, the 30-year fixed ends 2022 at 6.42%, up from about 3.11% a year ago. mission accomplished.
House prices have peaked and started to fall
Once the reality of very high mortgage rates dawned, the housing market stalled and began to collapse.
It began with a year-over-year decline that was in the double digits. And that eventually led to a month-on-month decline.
newest report good CoreLogic shows that home prices are expected to increase by 8.6% in November 2022 as compared to November 2021.
But on a month-on-month basis, they were down 0.2% in November 2022 as compared to October 2022.
They are still expected to grow by 2.8% from November 2022 to November 2023.
However, individual markets have seen huge declines, especially if you consider top prices that may not be included in the data.
Zillow recently reported that home values in Austin (-4.2%), San Francisco (-2.0%), and Seattle (-0.6%) were actually lower than they were last December.
This has caused many people to ring alarm bells to call for another housing market crash,
Low mortgage rates to the rescue?
While very high mortgage rates made 2022 a terrible year for home buyers, real estate agents, and mortgage industry workers, 2023 could be better.
Sure, it looked like we were on the verge of a crash, but it was mostly driven by high mortgage rates.
at their worst, 30-year mortgage rates climb above 7% Late 2022, but there’s been some serious relief since then.
30 year fix back is about 6%, and if you’re ready for pay discount pointsRates in the low-5% range are not out of the question.
Other than this better psychologicallyLower rates promote affordability and allow home sellers to receive higher asking prices.
This means spring may actually be home buying/selling season. be civil, This also means that year-on-year increases in house prices can be expected.
Of course, holding is very different from years of double-digit gains.
But it does represent a healthy housing market, which we should all be happy about.
Inflation may peak
If you look at the last few CPI reports, it appears that inflation may have peaked. We are not out of danger, but there are positive signs.
At the same time, the Fed should also work to raise its target fed funds rate. Prime rate It is determined by the Fed funds rate.
it has increased HELOC Rates For scores of homeowners. If/when the Fed stops raising and starts lowering its own rate, HELOC rates could come down.
This will provide further relief to existing home owners with these lines of credit.
Perhaps more importantly, if inflation has indeed peaked and is falling, long-term mortgage rates may also come down.
Low mortgage rates will buffer the housing market and limit any further decline in home prices.
The Fed may even benefit from these low mortgage rates!
OK, how do low mortgage rates benefit the Fed?
I may have buried the lead, but we got here eventually.
remember, the Fed has a ton on the balance sheet of the MBS. At last glance, about 2.6 trillion dollars.
They are currently offering up to $35 billion in MBS maturities and “running off” each month.
Since QT launches in June 2022, its MBS holdings are Fallen Roughly $67 billion, or about 2.5%. This is clearly too slow.
Here’s the problem the Fed is facing. With current mortgage rates significantly higher than the rates on all those MBSs, no one is refinancing their mortgage or selling their home.
So most of these MBS are not getting paid. This could force the Fed to sell MBS outright, which would likely be bad for rates.
But if mortgage rates return to more reasonable levels, we could see an increase in home sales. mortgage refinance, and so on. If it does, the associated MBS is paid out.
This would allow the Fed to rapidly unload its trillions in MBS. And that could benefit the Fed without upsetting the markets.
So in a sense, the Fed may start rooting for lower mortgage rates. Not 2-3% rates, but rates in the 4-5% range.
Read more: 2023 Mortgage Rate Predictions