Federal Reserve under fire over soaring house prices



A “ Doors Open ” sign is displayed when potential buyers arrive at a property for sale in Columbus, Ohio.

Ty Wright | Bloomberg | Getty Images

House price increases are accelerating at an alarming rate, fueled by inflation linked to the Covid pandemic, which some say is not getting enough attention from the Federal Reserve.

Nationwide home prices in January were up 11.2% year-over-year, according to the latest S&P CoreLogic Case-Shiller Index. This is the largest annual gain in nearly 15 years.

For comparison, the annual price increases were 10.4% in December, 9.5% in November, 8.4% in October, 7% in September, 5.8% in August and 4.8% last July. As of January 2020, the annual gain was only 3.9% and the monthly moves were in small fractions, not whole percentage points.

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“In over 30 years of S&P CoreLogic Case-Shiller data, the year-to-year change in January sits comfortably in the top decile. This strength is reflected in all 20 cities,” noted Craig Lazzara, Managing Director and Global Head of Index Investments. strategy at S&P Dow Jones Indices. “January’s price increases in every city are above that city’s median level and rank in the top quartile on all reports in 18 cities.”

The main reason home prices are now rising so rapidly is because high demand is meeting record supply. House bidding wars are now the rule, not the exception.

But mortgage rates also play a key role, designed by the Federal Reserve.

Although rates are rising slightly now, they are still close to their all-time lows, having set more than a dozen new lows last year. Mortgage rates loosely track the yield on the 10-year Treasury bill, which fell dramatically during the pandemic. Mortgage rates are also influenced by purchases and returns on agency mortgage backed securities, or MBSs. These purchases provide liquidity to the mortgage market.

The Federal Reserve had reduced its purchases of MBS in order to normalize the market after the last recession, but it reversed this trend last March with the start of the pandemic. It now holds more than a third of the MBS market.

At the start of 2019, the Fed held $ 1.6 trillion in agency MBS. He reduced that figure to $ 1.37 trillion in mid-March 2020. Then, when the economy and housing market suddenly plummeted from Covid, the central bank started buying more again. Last week, the Fed held $ 2.2 trillion in agency MBS.

“They continued on autopilot. I don’t think there has been any discussion within the Fed. The Fed is just afraid to change because it doesn’t want this to be seen as a way out. the foot of the pedal “. said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

The housing market has, in turn, exploded. The stay-at-home culture of the pandemic has hit consumers where they live, and demand for housing has yet to subside. Low mortgage rates have only fueled the fire.

“Again, why does the Fed always buy MBS? Since changes in house prices are not included in the CPI or PCE, the question is when and how this filters into the rent? imputed, but inflation is real for those looking to buy a home, ”Boockvar said. “The Fed is again responsible for pricing first-time buyers.”

A Fed spokesperson declined to comment.

But what if the Fed cuts back on buying again or stops buying MBS altogether?

“Is there some sort of liquidity break or crisis of confidence that is sending a shockwave through the financial markets? We’ve seen this happen before and it translates into lower rates for organic reasons, but without the benefit of the simultaneous strength of the financial markets, “said Matthew Graham, COO of Mortgage News Daily.

“With or without the Fed, rates were low due to the pandemic. Mortgage rates are exactly as far removed from 10-year Treasury yields as they have been over the past decade (and they don’t have never fallen below this historic range in the past year.) “Fares are going up because of the light at the end of the tunnel,” Graham said.

The US Federal Reserve Building in Washington, DC

Adam Jeffery | CNBC

The best case for cold water on the price of homes is therefore simply more supply in the market and less demand. Sellers have been very slow to act this spring, but buyers are starting to pull back, with some being excluded from homes they would like to buy.

“The tight affordability resulting from the strong growth in house prices and higher mortgage rates will discourage some potential home buyers from entering the market and remove the wind from it, slowing the rate of growth in house prices. ‘about half by the end of 2021, “said Selma Hepp, deputy chief economist at CoreLogic.

The lack of homes for sale remains the biggest concern, she added.

“Potential sellers can be put off by their inability to find a new home and subsequently choose not to list their own home – which leads to a vicious cycle of homes for sale declining,” Hepp said.


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