The housing market is on fire. The Fed fuels the flames.


Drive with one foot on the brake and the other while pressing the accelerator pedal to the ground. This describes the housing market, with the Federal Reserve pumping fuel into the system as supply and affordability constraints slow things down. At the very least, it is expensive; at worst, it risks serious overheating and failure.

Soaring house prices these days are playing out on general TV news and the front pages of newspapers, not just the business section. The story turned from a story about the exodus from cities under lockdown from the Covid-19 pandemic, triggering a rush that sent existing home prices up 23% in one year. Now, shortages of building materials, land and labor have added to the pressure, potentially hampering house building.

Throughout the saga, the Fed has provided tankers of liquidity, reducing its short-term interest rate target to near zero and buying $ 120 billion in securities per month since the spring of 2020 for counter the economic impact of the pandemic.

The swift and aggressive response from monetary and fiscal authorities, which included passing the $ 2.2 trillion care law, resulted in the shortest recession on record, starting in February 2020 and ending just two years ago. months later the National Bureau of Economic Research, the arbiter of these matters, announced last week.

While the recession officially ended 15 months ago, the central bank is continuing its emergency policy. As the Federal Open Market Committee meets this week to develop short-term policy, buying bonds will surely be a key topic, as Fed Chairman Jerome Powell said in his testimony to Congress on July 15.

One question many critics want answered is whether the Fed will continue to buy $ 40 billion in agency mortgage-backed securities per month as the housing market overheats. Powell said the impact of buying MBS is not much different than the Fed’s monthly purchases of $ 80 billion of Treasury securities because the bond market views the two sectors as similar.

That $ 40 billion in net monthly mortgage securities purchases is actually an understatement, says Barry Habib, founder and director of MBS Highway, a consultancy firm. After factoring in the reinvestment of interest and principal payments that homeowners make on their mortgages, as well as cash flow from refinancings, the Fed is actually buying about $ 100 billion in MBS per month, it claims. -he. He notes that the The political directive of the FOMC now specifies purchases of “at least” these amounts of MBS and Agency Treasuries.

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Habib estimates that buying MBS lowered mortgage interest rates by 25 to 35 basis points. (One basis point is 1 / 100th of a percentage point.) This equates to a subsidy for creditworthy borrowers, who would qualify for conventional loans that can be purchased by

Fannie Mae


Freddie mac,

and for larger jumbo loans held by private lenders. But he notes that stopping Fed buying would hurt borrowers who get FHA and VA guaranteed loans, which are bought by Ginnie Mae. (These government-funded companies bundle loans into mortgage-backed securities that can be purchased by investors, including the Fed.)

Anticipating the eventual end of central bank purchases, the market has already increased the yield spread of agency MBSs to comparable T-bills by about 20 to 30 basis points, said Walt Schmidt, head of agency MBS. mortgage strategies at FHN Financial, an institutional fixed income investment firm. solidify. But the enlargement was not as bad as it was during the 2013 “tantrum” which, he notes, began in the MBS sector, even before the Fed chief of the At the time, Ben Bernanke did say that the Fed would start cutting back on its purchases of securities.

What’s also different now is how hot the housing market is. Builders can’t keep up with demand, as the fiscal third quarter earnings report of

DR Horton

(ticker: DHI), the country’s largest automaker by volume, suggests. Even though net earnings per share rose 78% year-over-year, beating analysts’ forecasts by 8%, its stock fell 2% on Thursday.

Future orders were down, not because of lower demand, but because the company was slowing sales. “Based on the stage of completion of our homes and current inventory, production schedules and capacity, we plan to continue to restrict the pace of our customer orders,” said Bill Wheat, DR’s CFO. Horton, during the analyst conference call, Reuters reported.

The inability to meet demand is an enviable problem for any business. And Habib says the fundamentals of the housing market have been strong since the birth “explosion” about 33 years ago. Consumers born during this era are entering their prime years to start a family and buy a home. He adds that, in part because of less lax lending standards, the current situation is nothing like the 2000s bubble, when it was “one person buying four houses” as a speculation.

Shares of DR Horton are down 14% from their peak in May, about average for the homebuilder group, which is suffering as high supply and prices thwart strong demand. As builders struggle to secure enough materials, appliances, and labor, the Fed can continue to buy the MBS agency with dollars created with the click of a mouse.

More money chasing too few goods is the classic definition of inflation, which has been deemed “transient” by the Fed. A growing number of central bank officials have started to argue that the time is right, or at least approaching, to do more than just talk about cutting the $ 1.44 trillion in annual bond purchases.

The recent performance of manufacturer stocks suggests that the central bank is not helping by keeping the accelerator pedal on the ground amid supply constraints.

Write to Randall W. Forsyth at [email protected]


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