The Federal Reserve, the Housing Market, and Mortgage Rates

The housing economy is one of the remarkable stories we will remember about the COVID experience in the USA. In March when the nation shut down and the President issued executive orders to slow the spread, families across the country were hit with concern and uncertainty. Would they get sick, would they lose their job, would we make it through? The answers all became clear as the weeks and months unfolded. One reality ensued, that being the incredible surge in home purchase activity and mortgage demand.

The hero for the economic resilience and housing demand has one sole champion and that is Chairman Powell of the Federal Reserve. Recession risk requires fiscal and monetary response to keep an economy functioning. The Cares Act provided for small business loans, eviction and foreclosure moratorium, monies for health care and equipment, and checks sent to most Americans. But it was the monetary policy of the Federal Reserve that drove interest rates to record lows. This has impacted homeownership demand and provided an opportunity for millions of existing homeowners to lower their mortgage payments and even pull some cash out in some cases.

To get through recessions, the key is to sprinkle money everywhere so that people can keep spending. If consumers keep buying the critical gears of the economy keep turning and a nation ultimately recovers. The actions of the Federal Reserve were so impactful that the recession lasted less than three months, ending before the third quarter of 2020.

Here’s how Powell fueled demand. The term Quantitative Easing (QE) became well known during the Great Recession of 2008 and was used again in 2020. This is when the Federal Reserve creates a “short” in the supply of treasuries and mortgage-backed securities (MBS) by purchasing a large volume of them. The drop in supply of available government backed bonds leaves the remaining buyers around the globe fighting for what’s left. This makes prices rise, which produces a corresponding lower yield. The result is lower rates.

According to the Urban Institute, “In March the Fed bought $292.2 billion in agency MBS, and April clocked in at $295.1 billion, the largest two months of mortgage purchases ever; and well over 100 percent of gross issuance for each of those two months. After the market stabilized, the Fed slowed its purchases to around $100 billion per month in May, June and July. Fed purchases in July were $104.6 billion, 35 percent of monthly issuance, still sizable from a historical perspective.”

The actions of the Fed did not stop there. They also dropped the fed funds rate to .25% driving short-term rates to the lowest level in history. The fed funds rate is expected to remain at least through 2021.

All of this is why the stock market has been soaring back as investors see the light at the end of the tunnel for this pandemic and expect to see the US economy continue growing at a healthy pace in the years ahead.

For homebuyers who are able to take advantage of this, they are going to get the benefit of historically low rates and long-term home price appreciation. The Harvard University Joint Center For Housing Studies forecasts that there will be 12-14 million new households formed over the decade ahead, boosting the need for more homes to be built. The demand for homes will drive retail sales growth and more as movers, appliance companies, painters, landscapers, and more drive employment in concert with the demand.

What began with fear and uncertainty is not over. We are a nation anxiously awaiting an effective vaccine, a presidential election, and more. But one certainty is here to stay and that is the confluence of demographics and interest rates is driving a near historic year in home sales across the nation. Those that can take advantage of buying a home this year will be part of the good news that comes from an otherwise challenging year.

David H Stevens, CMB is the CEO of Mountain Lake Consulting, Inc and an advisor to George Mason Mortgage. David was the CEO of the Mortgage Bankers Association in Washington DC and served as the US Assistant Secretary of Housing and Federal Housing Commissioner for President Obama.

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