Homes are selling at a rapid rate across much of the United States due to a market imbalance, many say the Fed has stepped up.
Aaron Layman has never seen a more competitive housing market.
Layman, a real estate broker and housing analyst based in Denton County, Texas, said hOmes for sale in the Dallas-Fort Worth area sell out on average in about six days, compared to an average of 45 days. A wave of speculators flooded the market with all-cash offers and reduced inventory to around 15% of usual levels. And modest single-family homes cost 20% more than their listing price in a matter of hours.
“It’s just crazy. The homes will be listed on Thursday and they’ll be reviewing 20 deals by Sunday night,” Layman said in an interview.
These same conditions are occurring in housing markets across the United States, as historically low mortgage rates, changing working conditions, and over a year of pent up savings have created an extreme imbalance between supply and demand. request. Home values in the United States hit an all-time high in April and registered the largest annual increase – 11.6% – since 2005, according to Zillow, a online real estate market.
Home values in April soared in the hottest real estate markets, jumping 25.5% year-over-year in Austin, Texas, 20.4% in Phoenix and 18.3% in Salt Lake City, according to Zillow.
The supply also collapsed. In April, there were 1.16 million homes for sale in the United States, down 20.5% from April 2020, the National Association of Realtors reported on May 21.
This unprecedented seller’s market, Layman believes, is also intensified by the Federal Reserve’s monetary policy, in particular by the central bank’s continued $ 40 billion monthly purchases of mortgage-backed securities.
The market exploded in April, about a year after the Fed began buying $ 40 billion in mortgage-backed securities in a bid to avoid the worst economic impacts of the COVID-19 pandemic. The Fed’s strategy was similar to a program launched by the central bank in January 2009 to buy hundreds of billions of dollars from MBS in response to the current financial crisis.
The central bank is now facing criticism that its monetary policy is contributing more to a potential crisis in the domestic housing sector.
The supply force
On March 23, 2020, as the coronavirus pandemic took hold, the Fed announced that it would continue its quantitative easing program indefinitely. The plan called for monthly purchases of $ 80 billion of US Treasury bonds and $ 40 billion of MBS, bonds typically secured by a set of similar home loans.
Market participants have been worried about when the Fed may start to tone down or cut back on these purchases, but MBS purchases have come under increased scrutiny as the domestic real estate market caught fire.
“It’s fueling the real strength we’re seeing in the housing market, there’s no question about it,” said Mickey Levy, chief economist for the Americas and Asia at Berenberg Capital Markets LLC. “This keeps mortgage rates lower than they would be otherwise … there is simply no argument for the Fed to continue buying MBS.”
The Fed held more than $ 1.1 trillion in MBS in May 2010 after more than a year of buying bonds in response to the financial crisis. Since ramping up its purchases in March 2020, the central bank has added around $ 900 billion in MBS and held around 32% of the total securities market in May, according to Bianco Research.
Now, with roughly $ 2.2 trillion of MBS in U.S. federal holdings, economists and policy makers are wondering if the Fed is doing more harm than good to a real estate industry in a buying spree.
“Federal Reserve asset purchases artificially reduce interest rates and financing costs, which reinforces the need for the buyer to pay higher prices. This is even more detrimental because the higher price means that the buyer borrows more and takes additional leverage, ”said Michael O Rourke, chief market strategist at JonesTrading, in an interview.
Some central bank officials have said there is a need to at least curb MBS purchases, as low refinancing costs and low mortgage rates have spurred a pick-up in real estate purchases that demand is failing to keep up for now.
Eric Rosengren, Chairman and CEO of the Boston Fed, said on May 5 that the mortgage market “probably doesn’t need as much support now.”
“In fact, one of my financial stability concerns would be if the housing market gets too overheated,” Rosengren said at a virtual event hosted by Boston College.
Fed Chairman Jerome Powell has given no indication of when the Fed might even begin to discuss cutting its $ 120 billion in monthly securities purchases; however, the minutes of the April Federal Open Market Committee meeting indicated that such a discussion could take place.
“A number of participants suggested that if the economy continued to move rapidly towards the Committee’s goals, it might be appropriate at some point in future meetings to start discussing a plan to adjust the pace of purchases of active, “according to the minutes, who were released on May 19.
The Fed is extremely hesitant to even indicate an easing of its securities purchases due to the possibility of repeating the “taper tantrum” of 2013, when bond yields climbed. A repeat could worry investors and trigger a surge in volatility in bond and equity markets.
“A premature jump in yields would tighten monetary conditions and could derail the recovery,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “This is why the Fed is so cautious.”
The question also arises as to what impact MBS purchases have on the current housing buying boom, said Nancy Vanden Houten, senior economist at Oxford Economics. The Fed purchases have played only a “small role” in the current housing market conditions, said Vanden Houten, adding: “I think the problems in the housing market are much deeper than those of the Fed. [quantitative easing] program.”
A home inventory shortage has been around for years, and much of the current buying frenzy has more to do with people working from home and looking for more space than with Fed policy, Vanden Houten mentionned. The Fed will likely be able to conceive of the reduction in bond purchases without much impact on the market.
“I don’t think the Fed will end the program prematurely and I don’t expect a temper tantrum when it does,” Vanden Houten mentionned.
To avoid the possibility of such a tantrum, economists have proposed a “switch” rather than a “cone,” Berenberg’s Levy said. Instead of continuing to buy MBS, the Fed would trade that $ 40 billion to buy longer-term US Treasury bonds, such as 10 and 30-year benchmark bonds.
“A ‘change’ is not a ‘tap’, rather it shows that the Fed is willing to remedy the market dysfunction and establish a longer trail to its end goals,” wrote Satish Mansukhani, MBS strategist at Bank of America Securities, in a March 12 press release. paper that nicknamed the idea “Operation Switch”.
Layman, the Texas real estate broker, sees few options without consequences in the market and noted that ending, easing or continuing MBS purchases could ultimately worsen the imbalance in the housing market by causing soaring rates.
“I think they know deep in their hearts that they have created a giant mess and that there is no easy fix,” Layman said. “They are going to keep doing what they are doing and are hoping it comes to a soft landing. But it will be very difficult to do.”