The Fed has let interest rates go low and is one of the main reasons for the housing boom.
With inflation driven by the new crown (CCP virus) epidemic, home prices have risen alarmingly, and some believe the Federal Reserve Board (Fed) is partially responsible for this.
According to the latest S&P CoreLogic Case-Shiller index, national home prices rose 11.2% annually in January, the largest annual rate of increase in nearly 15 years.
This compares with annual increases of 10.4% in December, 9.5% in November, 8.4% in October, 7% in September, 5.8% in August and 4.8% in July. January 2020 saw an even smaller annual increase of just 3.9% and an even smaller monthly increase of less than 1 percentage point.
The main reason for the rapid rise in home prices is that strong demand has overwhelmed the record low supply, and bidding for homes is now the norm.
But mortgage rates are also a key factor, and this part is controlled by the Fed.
Although interest rates are now slightly back up, they are still near historic lows. Mortgage rates are roughly linked to the 10-year Treasury yield, which fell sharply during the epidemic. Mortgage rates are also influenced by the amount of agency mortgage-backed securities (MBS) purchases and the colonial rate. These lines provide liquidity for the mortgage market.
At one point, the Fed scaled back MBS purchases to normalize the market, but with the outbreak of the new crown epidemic, the Fed reversed the situation last March. It now owns more than one-third of the MBS market in terms of issuance.
Bleakley Advisory Group investment chief Boockvar (Peter Boockvar said), “They just continue to buy, and I don’t think there’s any discussion within the Fed. It’s just afraid of change because it doesn’t want to be seen as stopping easing.”
But what if the Fed scales back its purchases again, or stops buying MBS altogether?
Matthew Graham, chief operating officer of Mortgage News Daily, said, “With or without the Fed, rates are low because of the new crown epidemic. The gap between mortgage rates and the 10-year U.S. Treasury yield is as wide as it has been for the past 10 years and has never broken through in the past year. Mortgage rates are rising as the light at the end of the tunnel dawns.”
CoreLogic Deputy Chief Economist Hepp (Selma Hepp) said, “The strong uptick in home prices coupled with lower affordability due to high mortgage rates will allow some potential home buyers to exit the market and therefore get out of the woods, with home price appreciation estimated to be about half by the end of 2021.”
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