During a National Association for Business Economics (NABE) conference in Philadelphia, Fed Chairman Jerome Powell admitted that they may have gone too far in buying mortgage-backed securities a few years ago.
The Fed’s controversial purchase of MBS led to record low mortgage rates, with the 30-year rate falling to 2.65% in early 2021.
While the move was ostensibly intended to “facilitate broader economic conditions,” we all know it led to a massive home buying frenzy.
And it came at a time when housing affordability was already at a tipping point.
But instead of easing conditions, it led to house prices being about 50% higher in many markets across the country, creating an even bigger housing crisis.
Should the Fed have stopped MBS purchases sooner?
Powell told attendees at the NABE conference yesterday that they might not have done the last round of quantitative easing (QE) during the pandemic years.
“With the clarity of hindsight, we could have and perhaps should have stopped asset purchases earlier,” he said.
Adding that “Our real-time decisions were meant to serve as insurance against downside risks.”
Now, it would be unfair to go after Powell here because the pandemic was an unprecedented time and extreme measures were taken.
But it seems painfully obvious that we didn’t need record low mortgage rates during that time.
The 30-year fix was already quite low in early 2020, averaging around 3.75%. Speaking of hindsight, I’m sure someone would jump at such a low speed today.
In March 2020, the Fed announced its latest round of QE, promising to increase “its holdings of mortgage-backed securities by at least $200 billion.”
The argument at the time was that the agency MBS was “central to the flow of credit to households and businesses.”
Sure, we should always have a functioning mortgage market, but did we need the 30-year bond to go from 3.75% down to almost 2.50%?
Probably not, and in hindsight we know it created even bigger problems for the housing market.
As well as undoubtedly leading to significantly higher house prices (some markets rose another 50% or so), there is also the issue of mortgage lock-in.
Pandemic savings are locked in for another 25 years
The problem with artificially suppressing mortgage interest rates is that it’s not just temporary.
By far the most common type of home loan in the US is the 30-year fixed-rate mortgage.
As the name suggests, you get a fixed interest rate for a full 30 years (the entire loan period).
So the Fed’s purchases of MBS during 2020, which pushed interest rates to all-time lows in 2021, will remain until the year 2050, assuming the borrower keeps the mortgage.
Although perhaps it should have been temporary relief for homeowners (and home buyers), the Fed provided relief for the next 30 years.
It’s great for the haves, but terrible for the have nots.
We now have a strange dynamic known as the mortgage rate lock-in effect, where the gap between outstanding rates and today’s market rates is huge.
For example, a homeowner with a 2.75% 30-year fixed now faces a rate of, say, 6.25% or higher if they were to move.
It locks them into their property and thus exacerbates the problems of the housing market even more.
There are even fewer vacant homes for sale because there is much less willingness to sell and face massive payment shock.
Powell also said, “We certainly wouldn’t engage in the purchase of mortgage-backed securities as a way to address, um, mortgage or home interest rates directly, that’s not what we do.”
While we also say, “We have, as I mentioned, a very large amount of mortgage-backed securities …”
So he basically recognizes that moving forward is not in their toolbox, even though it was in the past.
They will NO LONGER buy MBS as it appears to have exacerbated the problems already present in the housing market.
In other words, Don’t expect the Fed to help lower mortgage rates again. Instead, look at typical market dynamics, like financial data for future price movements.
If you want lower mortgage rates, root for a slowing economy, not another Fed “bailout”.
Just a warning though. While Powell admitted it was a tool used in the past, apparently not to lower mortgage rates, it probably won’t be in the future, at least with him at the helm
Although it’s kind of a rub…would a new look Fed dial back QE and let the housing market “cook” again?
(photo: Kevin Dooley)
