The Federal Reserve has bought $982 billion of the mortgage bonds since March 5, 2020.  As Federal Reserve officials discuss how to eventually scale back their easy-money policies, they are debating whether to start by reducing purchases of mortgage-backed securities to avoid adding more fuel to the housing boom.  How will this impact rates? What does this mean for real estate?

What does “tapering” mean for real estate?

The Fed has bought $982 billion of the mortgage bonds since March 5, 2020, and currently plans to keep buying at least $40 billion each month. Those purchases, along with the Fed’s monthly purchases of $80 billion of Treasury debt, aim to hold down long-term borrowing costs to stimulate the economy as it recovers from the effects of the pandemic.

One option suggested at the meeting was to start scaling back the mortgage-bond purchases earlier or more quickly than the Treasury debt purchases, officials said. Call it a two-speed taper.

“There are some unintended consequences and side effects of these purchases that we are seeing play out,” Dallas Fed President Robert Kaplan said in an interview, referring to the mortgage-bond purchases, which he thinks are contributing to skyrocketing home prices. He had said previously that he was questioning whether the purchases are still needed. “I’ve shared my views” at the policy meeting, he said.

As the federal reserve “tapers” they essentially will buy less mortgage securities and treasuries.  As they buy less, prices will decline, and yields will increase (remember yields/rates and prices move in inverse to each other).  This will contribute to a steady rise in longer term treasury yields and in turn mortgage rates.

 

What does this mean for real estate?

With residential real estate appreciation off the charts, the federal reserve is getting nervous about monetary policy being a bit too easy.  My interpretation of the recent meeting is that the Federal Reserve is beginning to internalize that inflation might not be as transitory as they had stated and asset valuations are getting a bit lofty.

With the change in tone of the recent Federal Reserve meeting there will be two primary impacts on Real Estate:

  1. Mortgage rates higher: There is no way for mortgage rates to go other than up. I think over the course of the year rates will end ½ to ¾ of a percent higher than where they are today.  This will make housing relatively more expensive.
  2. Real estate sales slow: As rates head higher, real estate sales will also moderate as the market’s “feeding frenzy” becomes a bit more normalized.

Summary:

With inflation rearing its head and assets like real estate looking a bit frothy, the Federal Reserve is winding down its easy monetary policy.  Prices recently soared in the most recent consumer price index reading (up 5.4%) to the largest gain in 13 years.  This recent reading will push the federal reserve to move sooner rather than later on their tightening.

The largest driver of real estate over the last several years has been rock bottom interest rates.  As rates rise, due to the Federal reserve tapering, real estate will cool down substantially.  The hope is that it is a gradual process to not “spook” the markets, but history is not on the side of the federal reserve as the majority of time they tend to overshoot or undershoot with their guidance creating a “taper tantrum” which could lead to a larger correction.

Additional reading/resources

 

 

  1. https://www.cnbc.com/2021/05/21/the-federal-reserves-so-called-taper-talk-could-keep-markets-on-edge-through-the-summer.html
  2. https://www.wsj.com/articles/fed-officials-debate-scaling-back-mortgage-bond-purchases-at-faster-clip-11624872602?mod=mhp
  3. https://www.washingtonpost.com/business/2021/07/13/inflation-cpi-june-prices-fed/

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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