Barons February 23, 2022 |REAL ESTATE|COMMENTARY| “The Fed is Making Big Changes. How They Will Play Out in the Housing Market” “Expect higher rates and slower house price appreciation as the Fed begins to wind down its portfolio” by Laurie Goodman.
“As Cost of construction labor and materials skyrocket, it is reasonable to expect some slowing in new home construction” writes Laurie Goodman-(Fellow at the Urban Institute and was director or co-director of The Housing Finance Policy Center at Urban that she founded in 2013.
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Summary by 2244
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The Fed Balance Sheet
Since the impact of the pandemic took shape in March 2020 the Fed “engaged in large-scale asset purchases” namely Treasury Bonds and Mortgage-Backed Securities in an effort “to support smooth functioning of the market.” Later, “as the market stabilized” purchases were tapered appropriately and as of November 2021 “the Fed [formally] announced a reduction…”
Interest Rates
“The theory behind the Fed’s balance sheet plans”...is that these actions affect the Fed’s “open market operations which “target short term interest rates.” The effect of tapering is lower yields and “higher prices.” Investors will then seek higher yields offered by corporate bonds etc.
How these changes affect the housing market
Home price increases have already started to moderate from the impact of low inventory and high demand, brought on in part by catch-up buying by Millennials and a general trend of needing more space to accommodate working from home, and should “moderate further” because price appreciation and increasing interest rates will “challenge affordability…”
With home prices up more than 18% YOY end of 2021 vs end of 2020 and interest rate rising how does this lower affordability then play out in real terms? The payment on a “30 year fixed rate mortgage would cost over 39% more…” “(The math” a $300,000 mortgage at 2.67%...monthly…payment is $1,212” but with appreciation the home would now be $355,500 and the interest rate 3.92% “for a payment of $1681.)”
These changes will slow price appreciation but “it’s hard to envision outright decline in prices given the tight demand.” Higher interest rates will slow some refinance but “given the substantial home equity that borrowers have, cash-out refinance activity will likely stay robust.” Existing home sales may slow as “homeowners stay in their homes longer to preserve their lower-rate mortgages.” Some though may choose to stay and upgrade the home by tapping “home equity lines of credit and other second mortgage products.”
With less refinance etc. “credit standards” may loosen “particularly on new purchase mortgages.” Having said that rising rates for new construction and rising labor and material costs “it is reasonable to expect some slowing in new home construction.”