Bbg: Fed's Damage To Housing May Last Years

Opinion: Allison Schrager

Bloomberg headline: The Fed’s Damage to the Housing Market May Last Years

Subheadline: The central bank created major distortions in a market where many Americans have most of their wealth. Why?

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

The real estate market has been on a wild ride. House prices, measured by the Case-Schiller index, increased 30% between March 2020 and December 2021, a steeper rise than the lead-up to end the housing bubble in 2008. This was in part because many people moved during the pandemic, but also because the 30-year mortgage rate was only 2.65% in spring of 2021.

The impact of the Fed’s interference may be felt for years. In the spring of 2020, the Fed was desperate to avoid economic collapse, so it reverted to its 2008 playbook. It cut rates to zero and brought back quantitative easing, buying long-dated government bonds and mortgage-backed securities (MBS). Most residential mortgages are securitized by Fannie Mae or Freddie Mac, and resold in what is known as an agency MBS.

In 2020, the mortgage-backed security market was in trouble, and the Fed was even more aggressive than it was in 2008. It effectively became the only ultimate buyer of these securities: Its holdings of agency MBS increased by $1.3 trillion between 2020 and 2022, while the market for agency mortgage-backed securities grew by $1.5 trillion. The Federal Reserve now holds more than 40% of the total outstanding amount of agency MBS, or nearly half the market.


More from Allison Schrager, and I salute her honesty here:

Even though the Fed has ended QE, its role in fueling the screwy housing market may last for the next decade. The Fed would like to shrink the size of its MBS portfolio. So far it plans to do so by not reinvesting all the securities as mortgages are paid off.

But higher rates mean fewer people will refinance or move, so the mortgage portfolio won’t shrink as fast as the Fed anticipates. There are some whispers about the Fed selling some of its mortgage-backed securities. If that’s the case, Charles Schwab expects the MBS spread will grow even larger, and odds are so will your mortgage rates.

There will also be a hangover from the very low rates in 2020 and 2021. Like many people, I bought a home in the spring of 2021. Now between rising rates and a slower housing market, I am not sure I can ever afford to move. The housing market may be slower and less liquid for a long time.