Driving with one foot on the brake and the other pressing the gas pedal to the floor. That describes the housing market, with the Federal Reserve pumping fuel into the system while supply and affordability constraints slow things down. At the very least, this is costly; at worst, it risks serious overheating and a breakdown.
Soaring house prices these days get play on general television news and the front pages of newspapers, not just the business section. The story has progressed from one about the exodus from cities under lockdown from the Covid-19 pandemic, setting off a scramble that has pushed up prices of existing homes by 23% in a year. Now, shortages of building materials, land, and labor have worsened the squeeze, potentially braking home construction.
Throughout the saga, the Fed has provided tanker cars of liquidity, by slashing its short-term interest rate target to near zero and by buying $120 billion of securities per month since the spring of 2020 to counter the pandemic’s economic impact.
The rapid, aggressive response by the monetary and fiscal authorities, which included the passage of the $2.2 trillion Cares Act, resulted in the shortest recession on record, starting in February 2020 and ending just two months later, the National Bureau of Economic Research, the arbiter of such matters, announced this past week.
While the recession officially ended 15 months ago, the central bank continues its emergency-level policy. As the Federal Open Market Committee meets this coming week to plot near-term policy, the bond-buying surely will be a key topic, as Fed Chairman Jerome Powell indicated in his congressional testimony on July 15.
A question that many critics want answered is whether the Fed will continue purchasing $40 billion of agency mortgage-backed securities per month while the housing market is superheated. Powell testified that the impact of MBS buying isn’t significantly different from that of the Fed’s monthly purchases of $80 billion of Treasury securities, because the bond market sees the two sectors as similar.
That $40 billion of net monthly mortgage securities purchases actually is an understatement, says Barry Habib, the founder and head of MBS Highway, an advisory firm. After taking into account reinvestment of interest and principal payments that homeowners make on their mortgages, plus cash flows from refinancings, the Fed actually is buying about $100 billion of MBS a month, he contends. He notes that the FOMC’s policy directive now specifies purchases of “at least” those amounts of agency MBS and Treasuries.
Read more Up and Down Wall Street: The Housing Market Is on Fire. The Fed Is Stoking the Flames.
Habib estimates that the MBS buying has lowered mortgage interest rates by 25-35 basis points. (A basis point is 1/100th of percentage point.) That amounts to…
Read More: The Housing Market Is on Fire. The Fed Is Stoking the Flames.