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How the Fed Can Benefit from Lower Mortgage Rates

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The Fed has played a key role in consumer mortgage rates over the past decade and its dynamics.

Back in 2008, they started buying multi-billion-dollar mortgage-backed securities (MBS). This is known as quantitative easing, or QE for short.

The goal is to push interest rates lower and increase the money supply. Doing so will increase economic activity. also known as lending and saved us from the Great Recession.

But the consequences of such plans That’s what inflation is called.

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The Fed also knows that these assets cannot be held indefinitely. But how do they unload their goods without disrupting the market?

Quantitative Easing Leads to Hyperinflation

The Fed conducted four cycles of Quantitative relaxationThis involved the purchase of both MBS and the US Treasury.

The final QE was extended to 2020 as the COVID-19 pandemic moved the global economy.

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in the process Mortgage rates hit record lows.The 30-year constant dropped as low as 2.65% during the week ending Jan. 7, 2021, per Freddie Mac.

and the 15-year constant dropped to 2.10% on July 29, 2021. These low rates are record lows.

They are so cheap that they are also creating a frenzy in the housing market. Home prices jump nearly 50% From late 2019 to mid 2022

Obviously, this was unhealthy growth and a symptom of hard earned money.

The Fed is finally taking steps to cool the housing market.

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Fed realized they had inflation problemThey also realize that housing demand is completely out of their control.

People are buying homes at any price, mainly due to record low mortgage rates.

It’s not just a housing issue, as some have pointed out. This means they have the power to cool off the overheated housing market. just back the way

when they finally noticed Quantitative tightening (QT) was introduced in mid-2022. It works the opposite of QE.

Instead of buying them, they are letting these securities run out. And that means unloading treasuries and MBS, albeit at reasonable rates with limits.

Without a major buyer of MBS, supply will increase. bond prices fall increased returns and consumer mortgage rates are rising.

No one can predict how much they will increase in such a short period of time, that is also unprecedented.

Mortgage Rates Double in One Year This is the first time this has happened in history.

The 30-year constant ends in 2022, averaging 6.42%, up from about 3.11% a year earlier, according to Freddie Mac. Mission complete.

Home prices peak and begin to fall.

As the reality of higher mortgage rates the housing market stalled and began to decline.

It started with slowing profits year on year. which is a two digit number And that eventually leads to a month-on-month decline.

newest report According to CoreLogic, home prices rose 8.6% in November 2022 compared to November 2021.

But month on month, it was down 0.2% in November 2022 compared to October 2022.

It is now still expected to increase 2.8% from November 2022 to November 2023.

However, individual markets have much larger declines. Especially if you consider the highest price that may not be recorded in the data.

Sillow recently It points out that home values ​​are lower than December last year in Austin (-4.2%), San Francisco (-2.0%) and Seattle (-0.6%).

This caused many people to ring the alarm bell to call again. housing market collapse.

But wait…

Low mortgage rates to help?

Although much higher mortgage rates will make 2022 a scary year for homebuyers. real estate agent and employees in the mortgage industry, but 2023 may be better.

Of course, it looks like we’re in a crisis. but for the most part The main factor comes from the dramatically higher mortgage rates.

the worst of them 30-Year Mortgage Rates Rise Above 7% At the end of 2022, but since then there has been a serious relief.

The 30 year constant will return about 6% and if you’re willing. pay discount pointsRates in the low 5% range are not a problem.

apart from this being Mentally betterLower rates increase affordability and allow home sellers to fetch higher asking prices.

This means that the spring home buying/selling season may be a reality. be niceIt also means predicting that house prices will increase every year.

Of course, holding is very different from earning multi-year double-digit gains.

But it represents a healthier housing market. in which we should all be happy

Inflation may reach its peak.

If you look at the last few CPI reports, It looks like inflation may have reached its peak. We didn’t leave the forest. But there are positive signs.

at the same time The Fed may proceed to raise its own target capital fund rate. prime rate is set by the Fed money rate

this has increased HELOC rate for homeowner rating If/when the Fed stops rising and starts lowering its own rates, the HELOC rate may drop.

That would provide more relief for existing homeowners with these lines of credit.

Perhaps more importantly If inflation truly peaks and is declining Long-term mortgage rates can also drop.

Lower mortgage rates will hurt the housing market and limit the downward movement in home prices.

These lower mortgage rates could even benefit the Fed!

So how does lower mortgage rates benefit the Fed?

I might bury the pillar But finally we got here.

Remember that Fed has ton MBS’s on the balance sheet overall is about $2.6 trillion.

They are now letting MBS valued at $35 billion and “run away”.

Since QT started in June 2022, the company’s MBS holdings have reduce About $67 billion, or about 2.5%, obviously too slow.

This is the problem the Fed is facing. With current mortgage rates significantly higher than all MBS rates. So no one refinances the mortgage or sells their home.

So most of these MBS are not paid. This could force the Fed to sell MBS outright, which would be bad for interest rates.

But if the mortgage rate drops back to a reasonable level We may see an increase in home sales. mortgage refinancingand so on. If so, the relevant MBS will be paid.

This will allow the Fed to carry trillions of data in the MBS much faster. And that could benefit the Fed without upsetting the market.

In a sense, the Fed might start rooting for lower mortgage rates, not rates in the 2-3% range, but rates in the 4-5% range.

Read more: Mortgage Rate Forecast 2023

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