Roaring U.S. housing market may cool, keep climbing as Fed ends emergency support

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US home prices have risen nearly 20% over the past year, benefiting families who have had a major boost to their finances during the pandemic.

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But Wall Street, a major source of home mortgage finance, sees significant questions for the red-hot housing market, now that the Federal Reserve has shifted its focus to tackling inflation as the economy recovers from the pandemic.

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“The rise in domestic prices was instrumental in increasing the domestic net”
Prices will further slow due to higher interest rates and declining affordability,” the fixed-income investment strategy team of Brad Tank and Neuberger Berman wrote in their first-quarter outlook.

“Additionally, federal forbearance programs for mortgages have not been renewed and families benefiting from the relief will need to resume payments.”

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The Fed’s December policy pivot includes a plan to raise benchmark interest rates at a faster pace than just weeks ago, but also a swift end to its emergency bond-buying program, which is now likely to take place by March.

According to the Neuberger team, this leaves the market with “two main questions,” namely, how much mortgage bond supply the others will need to absorb if the Fed shrinks. Balance sheet of about $8.8 trillion, Also, if interest rates rise as expected, what will happen to home prices and refinancing activity?

ReadingHousing is in the grip of an inflation storm – and it is exacerbated by the COVID-19 pandemic

Why housing isn’t like 2008

After the 2008 financial crisis, the government increased prominence in the US housing market, though its mortgage guarantees, but also the collection of bonds in the $8.2 trillion agency mortgage market.

Agency mortgage bonds accounted for 66% of all housing loans in December, according to the Urban Institute. This made the sector a benchmark for 30-year mortgage rates, with lenders originating more than $1 trillion in home loans in a quarter during the recent refinance boom.

The government’s massive footprint in the mortgage market following the subprime debacle a decade ago has meant an impact on mortgage rates and lending standards, but also Directed Federal Housing Relief To prevent a wave of evictions and foreclosures during the pandemic.

Many borrowers battling job losses in 2020 stayed in their homes instead of facing late fees, collections and even worse, until the economy was more solid.

Now, the forbearance rate on all home mortgages, even those with banks, has declined sharply from the peak of its pandemic, most recently as low as 1.7% in November (see chart), on the back of higher wages and low unemployment. has been calculated.

Minimizing Home Loan Defaults

Deutsche Bank

In terms of homes, according to Deutsche Bank researchers, this means only 835,000 homeowners were refusing in November, compared to 4 million before the pandemic.

Other major departures from the crisis of the last decade include a current housing shortage, coupled with a new era of institutional landlords in the single-family rental market.

That means Zillow Z, a private-equity owner with deep pockets,
-4.54%,
And other firms, with Wall Street financing, are competing with families looking to find themselves.

Mortgage experts say that mobility could help home prices continue to rise at a more modest rate in 2022, even as 30-year mortgage rates rise and make it harder for families to afford properties.

See: There has been an explosion in investor-owned homes in high-poverty areas in the Twin Cities. The Minneapolis Fed Is Now Tracking

“Rising rates don’t turn home prices negative, but they can certainly slow home price growth,” Scott Buchta, head of fixed-income strategy at Brain Capital, said in a phone call.

His forecast is for a 6% to 10% increase in prices this year, depending on where 30-year mortgage rates budge.

Is the rate too high?

In the wake of the 2008 crisis, the Fed has loaded its balance sheet over the past two years with Treasury and agency mortgage-backed securities during the pandemic, to keep liquidity flowing and credit affordable.

Fed Chairman Jerome Powell now expects a “soft landing” by raising interest rates and tightening financial conditions to rein in inflation, without hurting the job market or provoking a recession.

Many on Wall Street now expect short-term rates, potentially, to rise four times this year to the current 0% to 0.25% range. Long-term rates, however, will hinge on how aggressively the central bank shrinks its mortgage bond holdings, Bucta said, especially as the Fed achieves annual inflation closer to its 2% target from December’s 7%. works for.

“I don’t think they want to shock the markets,” he said, noting that home price appreciation has historically been about 2% to 3% higher than inflation, or about 5% annual growth. “20% is not sustainable.”

That said, every 100 basis-point increase in the 30-year mortgage rate translates to a roughly 13% drop in purchasing power for a homeowner dependent on financing, according to Buchta’s estimates.

In other words, affordability can be very bad that’s already a problem for many families with out-of-market prices.

as well Interest rates are rising – but the Fed’s actions could make it easier to get a mortgage

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