Bloomberg News reports that with the interest rates revolving around 5%, home sales currently have slid 14% more compared to last year. Few prospective home buyers are waiting and watching the rates and prices drop. The sellers also hope the market improves again to get a higher price.
However, it will not be wise to bank on the dropping rates before the pandemic lows. It is said that that resulted due to market manipulation of the Fed. Unless those rates become a regular in the market, they will not be returning to what they used to be.
The real estate market has suffered a rollercoaster ride. As measured by the Case-Schiller Index, house prices surged 30% between March 2020 and December 2021, a rise steeper than what led to the 2008 housing bubble. One of the reasons for the scenario was that many people moved at the time of the pandemic, aside from the fact that the 30-year mortgage rate was just 2.65% in the 2021 spring.
The interference of the Fed and its impact is here to stay and will affect for many years to come. In 2020 spring, to avert an economic collapse, the Fed returned to its playbook of 2008. It slashed rates to zero and brought the quantitative easing back, buying mortgage-backed securities and long government bonds. Freddie Mac or Fannie Mae secured the residential mortgages and resold them as an MBS agency.
Bloomberg News reports that the mortgage-backed securities market was in trouble in 2020, and the Fed had become more aggressive in comparison to what it was in 2008. It was the only buyer of the securities. The Fed’s holdings of the MBS agency surged by $1.3 trillion between 2020 and 2022, and the market for mortgage-backed securities growth was by $1.5 trillion. Presently, the Federal Reserve is holding more than 40% of the agency MBS’ total outstanding amount, which is equivalent to half of the market. The above actions were the main reasons for slumping rates.
Footprints of the Fed
There was a spike that spread at the beginning of the pandemic. However, as the Fed continued to buy, it slid to almost zero, triggering the housing market to rage. The spread began to rise again in June with the end of QE in sight. It again surged with the tapering down of the Fed’s purchases before halting in 2022 and the fall of 2021. Currently, the increase is higher in comparison to what it was before the pandemic.
Recently, the Fed has received criticism for delaying the rate hike in response to the raging inflation. However, there could be another error in policy that to continue to buy MBSs in 2020 and 2021, most of the part when the housing market was raging and the rates continued to slide, reports Bloomberg News.
