An “Open House” sign will be displayed when potential home buyers arrive at a property for sale in Columbus, Ohio.
Ty Wright | Bloomberg | Getty Images
Home price gains are accelerating at an alarming pace, driven by inflation caused by the Covid-related pandemic, which the Federal Reserve has given insufficient attention to.
House prices rose 11.2% year over year in January, according to the latest S&P CoreLogic Case-Shiller index. This is the biggest annual gain in almost 15 years.
For comparison: the annual price increases were 10.4% in December, 9.5% in November, 8.4% in October, 7% in September, 5.8% in August and 4.8% last July. In January 2020, the annual profit was only 3.9%, and the monthly movements were in small fractions, not whole percentage points.
“In more than 30 years of S&P CoreLogic Case-Shiller data, January year-over-year change is well in the upper decile. That strength is reflected in all 20 cities,” said Craig Lazzara, general manager and global head of index investment strategy at S&P Dow Jones Indices. “The price increases in January in each city are above the median for that city and are in the top quartile of all reports in 18 cities.”
The main reason property prices are rising so fast now is because of strong demand bumping into record lows in supply. House bidding wars are now the rule, not the exception.
But mortgage rates also play a key role developed by the Federal Reserve.
While interest rates are now rising slightly, they are still near historic lows after hitting more than a dozen new lows in the past year. Mortgage rates loosely follow the yield on the 10-year Treasury bill, which fell dramatically during the pandemic. Mortgage rates are also affected by Agency Mortgage Backed Securities (MBS) purchases and returns. These purchases provide liquidity to the mortgage market.
The Federal Reserve had cut its purchases of MBS to normalize the market after the last recession, but it turned that economy around last March with the outbreak of the pandemic. It now owns more than a third of the MBS market.
At the beginning of 2019, the Fed held $ 1.6 trillion in the MBS agency. That had fallen to $ 1.37 trillion by mid-March. Then, when the economy and real estate market were suddenly in Covid free fall, the central bank started buying more again. As of last week, the Fed held $ 2.2 trillion in MBS.
“They kept the autopilot on. I think there was no discussion within the Fed. The Fed is just afraid to change because they don’t want this to be seen as a way of taking your foot off the pedal.” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
The real estate market is blown up again. The stay-at-home culture of the pandemic has literally hit consumers where they live, and housing demand has not yet eased. Low mortgage rates only added fuel to the fire.
“Why is the Fed still buying MBS? With changes in home prices not reflected in either the CPI or the PCE, when and how this will affect imputed rent, but inflation is real for those who own a home.” want to buy, “he told Boockvar. “The Fed is again responsible for setting prices first– –Time buyers. “
A Fed spokesman declined to comment.
But what if the Fed reduced its purchases again or stopped buying MBS?
“Is there some kind of liquidity collapse or a crisis of confidence that is causing a shock wave in financial markets? We have seen this before and it results in interest rates falling for organic reasons, but without the benefit of financial market strength at the same time.” said Matthew Graham, chief operating officer at Mortgage News Daily.
“With or without the Fed, interest rates have been low because of the pandemic. Mortgage rates are as far removed from ten-year government bond yields as they have been in the past decade (and they have never fallen below this historic range in the past year). Rates are rising because of the light on End of the tunnel, “added Graham.
The Federal Reserve building in Washington, D.C.
Adam Jeffery | CNBC
So the best case for home-price cold water is simply more supply in the market and less demand. Sellers have been very slow this spring, but buyers are slowly pulling out, some from the homes they would like to buy.
“The affordability crisis stemming from strong house price growth and higher mortgage rates will deter some potential home buyers from entering the market and taking some wind out of the sails, which will set the rate of house price growth by the end of 2021 slowed down about half, “said Selma Hepp, deputy chief economist at CoreLogic.
The lack of homes for sale remains the top concern, she added.
“Potential sellers can be discouraged by their inability to find a new home and then choose not to list their own homes – creating a vicious circle of declining homes for sale,” said Hepp.