How the
Decision of the Federal Reserve
to Begin Tapering the Bond Will Impact the Real
Estate Market?
In its statement dated November 3, 2021, the Federal Reserve Open Market Committee (FOMC), has announced that the Federal Reserve (Fed), will start tapering the bond. In plain English, this means that the Fed will begin to reduce its bond purchases by $15 billion a month, $5 billion of which will be a reduction in the purchase of mortgage-backed bonds (MBBs).
Mortgage bonds are a pool of mortgages that are backed by real estate and real property. To put it simply, when a home sale is completed, the mortgagor or mortgage originator will typically bundle your mortgage with other mortgages with similar characteristics and then sell them to an investment bank or a government-sponsored entity such as the Federal Reserve.
To understand what is at stake, one shall remember that since the beginning of March 2020, the Fed began buying MBBs, each month to keep interest rates low. MBB purchases are a helpful Fed tool to stimulate the economy during fragile economic times such as the COVID 19 pandemic crisis, as lower interest rates and a higher money supply encourage consumers to take out loans, and banks to lend. In other words, lower interest rates have supported home sales volume, refinances, and home values since the beginning of the pandemic.
As a result, since the Fed began buying a large amount of MBBs in 2020, the mortgage interest rates have hit an all-time low at the beginning of 2021. While they have increased slightly throughout 2021, interest rates remain near these historic lows heading into 2022.
Even if the Fed has decided to reduce its MBB purchase the Fed in its MOMC also indicated it intends to keep the rates low.
As of today, it is too soon to forecast what will happen next year as so many factors are yet to be refined to get a clear answer such as but not limited to: the unemployment and inflation rate, the evolution of the COVID 19 epidemic: will it be under control or will we be facing another wave of it and so on. That said:
Some bond market participants are yet to be convinced that the Fed will be able to balance 2021’s projected high levels of inflation and low-interest rates to protect the housing market prices. In fact, according to a recent article published in the New York Times many investors believe the Fed will boost their benchmark rate as soon as mid-2022 which will lead to an increase in interest rates. In the same vein, the Mortgage Bankers Association expects an increase of the rate for 30-year fixed-rate mortgages from around 3.2% today to about 4% by the end of 2022.
Others are more optimistic, as rates even in the 3% range are still very low. It’s less than the current rate of inflation (5.4% in September 2021, according to the Consumer Price Index). With such low rates, there will still be plenty of buyers who want to jump in on a mortgage.
Only time will tell. Stay tuned…
Source: https://bit.ly/3Fc2cg3 ; https://www.finra.org