Given that there's nothing forcing the Fed to unload these mortgages, the option of putting them on the market (thus driving commercial mortgage rates higher) seems like a policy lever that will be good to have, cooling real estate inflation selectively separate from the federal funds rate.
Driving rates higher won't cool inflation except by raising prices - which is inflation.
They want to stifle the demand so as to match supply better, but when it's a supply shock and the United States is short something like 3 million houses, it seems a fairly punitive and misguided way to approach solving the problem.
You're on an island with five chairs. There are four people. Everyone has a chair.
Add six people. There are now five chairs and ten people. How can you manipulate the prices of chairs such that all ten people can have their own chair?
Artificially lowering the prices of chairs does not solve the underlying issue: There are not enough chairs for everyone that needs one.
By treating housing price surges as excessive demand (raising mortgage rates), you lower demand not only for _existing_ homes, but also for creating new homes. If your goal is to ensure that housing prices always go up and affordability/homelessness go in wrong direction, the Federal Reserve's policy is very effective.
They're wrong to prematurely kill demand before it can cause new housing construction to increase, fixing the underlying issue of not enough supply.
You're missing the people who have multiple chairs and are sitting on chairs hoping that price goes up who would be incentivized to sell (look at supply coming online as mortgage rates rise - and any similar pattern - i.e. 2018).
Price always going up makes chairs attractive to hold, which results in misallocation of chairs - ideally you want them to go to whoever wants chairs the most, not whoever grabbed a chair first.
Yes, the best answer is to make more chairs, but that is not something that the FED has much control over (it's federal/state/local zoning policy and regulation which prevent more supply).
The question the FED can address is not "how can we make sure everyone has a chair", but rather "how do we make sure that the existing chairs go to the people that need chairs the most"
Yeah, not really sure what the original commenter was on about... The price of money itself is higher when rates go up, so prices of goods and assets must go down to compensate for reduced demand
Is this what you would do if you wanted certain classes of people to capitulate on their "American Dream" and turn it into "at least I can rent a house from Goldman Sachs" for some reason?
There's another option that the fed isn't considering: let Congress find a way to force businesses out of congested areas where houses aren't and won't be available any time soon. There's also financially incentivising remote work and providing incentives to move away from major cities.
There's still a supply shortage in building homes to deal with, but that'd at least solve a problem for a good chunk of folks.
This doesn't fix the underlying problem. The vast majority of local governments make it very expensive or outright impossible to add significant amounts of housing via zoning and density bans. Pushing businesses into other areas will simply drive up housing prices in other markets, not to mention accelerate suburban climate arson.
The solution is to remove tariffs on imported wood to make new housing cheaper and to punish municipalities with racial segregationist-era housing/zoning policies.
I live in the Bay Area. Where are you going to add houses here that aren't protected land? Zoning isn't even a thing here; I live right behind a Denny's. Some of your assumptions seem vastly off.
There are places like Mountain View that don't allow building above four stories, which is crap, but stuffing people into towering buildings where they're not allowed to own the thing they're living in or immediately priced out of it (which serves as an investment) doesn't solve the housing crisis.
Edit:
I had a bit of a snarky reply, and I apologize if you read that. I pay a little over $3.5k for a house (that allows a big dog); if I lose this place I'll pay over $4k in rent per month and that number goes up by the month. I'm being forced to come into an office, which requires me to live near by. If I can't live near by, then I have to accept a lower paying job. Do you see the complexity of this issue?
Yeah I also don't buy the approach and commentary. Rates need to go up sure, but not with this much funfare. Killing the patient in the process to keep inflation in check makes little sense. And then there is the demand elasticity. How many people here are going stop using gas to go to work or stop eating to push prices down? Similarly with the baby formula -- where they suggested throwing money at the problem of lacking formulas: there is just not enough at retail for people to buy, doesn't matter how much money you have. What is the Federal Reserve going to do: tell babies to not eat?
This is misguided politic theatrics, that causes even more panic and over consuming due to panic, which leads to further stress and supply issues.
I read the article twice an I don't understand the challenge posed by leaving the mortgages on the balance sheet.
I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.
If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.
But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash?
I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.
Inflation’s main cause is printing trillions of dollars in unbacked currency. The Trump admin and now the Biden admin are very fond of doing so for the sake of short term political advantage.
> how does it make sense to cause a housing crash?
Less housing demand presumably means less home construction and renovation, which eases the strain on supply-chain limited resources. Lower home prices also reduce the amount of equity sellers, or HELOC borrowers, can spend on NFTs or whatever [1].
I think the idea is that the Fed is trying to tamper demand by softening the economy. Lower demand will inevitably help prices.
It doesn't help much though if we get a "rough landing" and people can't afford food/housing because they're out of a job.
It is not true that lower (local) demand will inevitably lower prices. For example if Costa Rica lower oil demand to almost 0 by saying only 1/1000 people could buy gas from now on it would not change the local gas price at all. If anything it could go more up as the fixed costs in infrastructure would be more expensive for each unit sold.
You can kill inflation with demand side strategies, even if the root cause of the recent changes in inflation are supply side.
Imagine an ad infinitum example. Let's say the price of gas goes to $1M a gallon. The fed then somehow removes every dollar from the economy. The price of gas is still going to be approaching zero when denominated in dollars after demand is forced to zero(in reality the price of gas would just change to be denominated in physical violence in this mad max scenario but that's an aside)
Only if you are the only country in the world (or bigger than the rest combined). That being said all of the central banks are doing the same so maybe it works that way.
If someone want they can get a free lunch, no need to increase the rate but everyone else lowers inflation for them.
You are refuting the details of my self admittedly absurd example. The point is, you can kill supply fueled inflation with demand side polices. Any country can do this within the scope of transactions denominated in the currency they control
Sure, but the effectiveness will be less if the "problem" is global. If the US has 50% of the worlds demand for some good, and only the US fights inflation, then the effectiveness of the measures taken will only be 50%. So for the US maybe that is still possible, but if you are Costa Rica that becomes meaningless.
I don't get how selling MBS on the market will lower housing prices, housing prices are a result of demand/supply + interest rate affordability, neither of which will be affected by selling MBS' that carry an older lower rate and don't pay out that much. I think it only results in Fed technically losing money.
> don't understand the challenge posed by leaving the mortgages on the balance sheet
There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.
Problem? No, it's working as designed: as a plausibly deniable mechanism to print trillions for rich people. Meanwhile, inflation will be blamed on the billions printed for poor people.
"Balance sheet that never rolls off" is very much in the same genre as "loan that is actually a grant" and "financing tax cuts with debt."
I dabble in news sources from both sides of the aisle and I've not heard the opinion that inflation is a result of poor people, only that its the result of a perfect storm of the pandemic and an unjust war halfway across the world, which mostly makes sense... who is blaming the poor?
I guess "everyone" is wrong. The huge influx of money is part of it but the current inflation doesn't have just one cause. There is a huge spike in energy costs partially from the war in Ukraine, partially from a decrease in production by the prices cratering in 2020 and partially from an increase in demand. There are huge supply chain problems everywhere. Massive labor shortages. I'm sure I'm missing some others. This isn't a simple problem with a simple cause.
It appears that one side is fantasizing about what they'd like the other side to say so they can attack on that. Of course, we're talking about a country of over 330 million so it is possible to find someone somewhere that holds any given opinion even if it's not widely shared.
It's not a fantasy to observe that the right-wing of the American political spectrum spent most of 2020 and 2021 screaming about individual handouts and unemployment benefits, while only raising a token protest about PPP loans, and the firehose of money that the Fed started dumping into the capital markets, starting in March 2020.
In reality, all of those steps were necessary to prevent economic disaster, but now that disaster has been averted, and wages started rising, everyone's clutching their pearls about inflation.
The "stimmies caused inflation" narrative doesn't just exist, it's widespread on the right. If you aren't hearing it, you probably have a small window. Reading Ground, for example.
In any case, the team sports side of this is much less interesting than the part that transcends team sports: both sides devote more media attention to the smaller money printers. Not by a small margin, either. That's an interesting choice. Does submarine go blub? Or does making the big money printer boring and complicated completely cloak it from view? Either way, it's an impressive multi-trillion dollar sleight of hand.
There are a number of fiscal and monetary mechanisms available to central governments and central banks respectively, which are used to spur economic activity and to relieve economic hardship: by directing government spending or by creating monetary liquidity.
The assertion is not so much that poor people cause inflation; rather, that inflationary fiscal and monetary policies are often only recognized as such when they happen to benefit middle-to-lower income people.
Example: PPP Covid programs which pay business owners billions is necessary and proper given the circumstances, but direct payments to taxpayers is not because it will cause inflation.
In truth, they both provide relief, and they both contribute to inflation.
When wages go up, it can either go at the expense of profits, or at the expense of prices (Or, most usually, both). The labour shortage in the pandemic created upward wage pressure, which added to existing pressure[1] caused by rising housing/healthcare costs.
Notice how interest rates went up, as unemployment hit an all-time low? Capitalists hate low unemployment, as it causes wages to go up. Raising interest rates cools off the market, reduces the number of speculative investments, and increases unemployment.
There's a reason that the government always wants a few million people to always be jobless. It puts the brakes on wage growth.
[1] This is most notable in resort towns. As housing prices went up, nobody who works a service job can afford to live in them anymore - so all the workers pack up, and move to the city. As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours. For some reason, tech folks vacationing in their lakeside dachas aren't keen on putting in a few hours at the local grocery.
> As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours.
If these were your only choices you were on the edge of profitability right before a global pandemic hit. Plenty of reasons for that. Commercial Rent Control is "progressive" and the people who own property like this can afford to let it sit vacant indefinitely and will literally abandon this amount of profit because they feel like it.
This started before the pandemic hit, the pandemic just accelerated the growth of housing prices in those towns, as remote-workers started moving to them.
what does this mean exactly? We can't raise the rates anymore without substantial structural shift in our economy? Such as the end of ridiculous earnings-to-price multiples?
Pretty much, to me I think the problems facing the US economy entirely revolve around wealth inequality and require significant, painful policy measures to fix.
We took a crisis of bank and consumer balance sheets and relocated it to the government balance sheet by artificially generating liquidity backed by government liabilities. We didn't change many of the underlying mechanics (if you believe that the mbs rating schemes and bad mortgages were a symptom and not a cause which I do, we did fix those things)
The problems with a debt crisis at the sovereign level is there is only one can left to kick and that's the inflation can. The government says they don't want inflation but if it comes down to real solvency issues, they are going to give in to inflation, if the choice is between that and defaulting.
We basically have been playing a liquidity shuffling game since the first tech bubble.
IDK why this is being downvoted...poster is right. QE never ended in 2008 or when it peaked in 2010...and the closest we came to trying was in 2010 which sparked a flash crash and was immediately shelved as an option in favour of three more rounds of QE on the house.
from TFA: "The Fed's pandemic actions fueled a housing boom"
well thats part of the issue (pulling a mini tarp), but the other half of the story is the extraordinary steps taken way back in 2010 to keep people in their homes in the first place. The government wanted cake and they wanted to eat it too. Banks that over-leveraged and pandered predatory loans were never allowed to crash and burn; they were almost all bailed out through TARP. homeowners in turn who accepted these loans were also often gifted with TARP assistance that kept them in overvalued homes. auto-makers without customers were never made to reform, only a few token concessions and mergers here and there for companies with a track-record of dismal performance, and a well published cosmetic defect when executives from these conglomerates came with dog-eared pockets to congress on private jets.
Effectively, when the market ran out of gas, the federal government began expectorating ether into the air scoop of the economy like a wasteland war boy effectively trying to outrun any crash that didnt focus entirely on the poorest members of society.
The recession of 2008 was absolutely fixed, in that bank collapses were prevented, highly leveraged products based on bad loans were drained from the balance sheets, underwriting was tightened up, and economic activity rebounded.
That fix was just never paid for, in terms of shrinking Fed balance sheets and renormalizing rates.
You can't halt a bank collapse, but you can postpone it and attempt to reduce the impact with inflation which is exactly what has happened.
Additionally, if you don't address the lack of regulation that allowed the collapses in 2008, which we absolutely did not, it will keep happening and those future occurrences will grow in severity. Since now, in order to 'make money', the frauds have to be bigger, faster, and more aggressive.
What do you mean you can't halt a bank collapse? That's exactly what we did. There was a solvency issue when panic ensued after MBS's blew up and we were able to limit a domino effect of bank failures after moving fast to inject capital into the system.
Do you mean it in a philosophical sense similar to the idea that every company will eventually go bankrupt given enough time? Any major crisis is capable of bringing down banks, its inherently a feature of fractional reserve banking but the benefits have so far outweighed the risks.
Kind of a silly article. When the Fed sells enough bonds, interest rates go up. It doesn't matter if they sell mortgage-backed securities or something else.
Selling these does not effect the housing market any differently from the Fed selling some other bond.
Dead wrong. Selling MBS affects the incentives of mortgage initiators in a vastly different way than selling Bonds. It's a direct pipeline to affecting bottom line mortgage rates for consumers as opposed to a highly indirect one. When bottom line mortgage rates for consumers go up, the housing market is affected directly and immediately.
I think if the Fed announced they were selling agency MBS as part of their QT program we would see a paradigm shift in markets. Like limit down kind of days. I think that's what the punch bowl being taken away truly looks like.
And if the S&P down 35% doesn't get inflation down, then I think that's probably next on the list.
Just curious, how does the Fed selling Freddie Mac and Fannie Mae/Ginny Mae mortgage backed securities cause a shift in the markets? What's the likelihood the Fed would actually do something like that?
An increase of MBS offered on the market will cause mortgage rates to rise because there's too many loans for sale and not enough buyers. Buyers will demand higher and higher rates to make it worth their while.
It's basically trying to kill housing demand via interest rates. Selling MBS is a much more direct effect on mortgage rates than something like the fed funds rate
The Fed is compounding its mistakes of not stopping QE last year by pulling forward QT in order to fight inflation that is outside of its control (Ukraine and China).
> it will incur big financial losses that reduce the funds the central bank returns to the Treasury...expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people
This isn't how it works.
No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when lowering rates. It will always lose money when raising them. This is close to mathematical fact.) The Fed can't go broke. Its operating metrics are inflation and unemployment.
> the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates
This is the real issue. But it's why we have an independent central bank. Nobody likes rate rises. It's why economies with weak institutions wind up hyper inflating. (No, we're not.)
The bigger the bubble the harder it pops. The harder it pops the more damage it does. The more damage it does the better it is for those who didn't buy into the madness. And I say this as a homeowner.
It would be ironic if a second housing bubble collapse causes a second financial crisis. It's entirely possible. It could start outside the US, in other Western countries where real estate prices have reached completely insane levels. In Canada, if there was a housing "bubble pop" then it would be catastrophic for the entire economy and financial system. It would not really be better even for those who didn't buy into the madness, unless they've been sitting on a hoard cash the whole time and buy at the right time. Most people never had the cash to buy into the madness, and if the music stops then they lose their job and a significant portion of their investment savings and are probably unable to take advantage of the opportunity. The rich always get richer, and the poor always get poorer, even in a financial crisis.
Nah I prefer to park my cash in highly volatile equities indexes, a basket of commodities fluctuating madly due to pandemic related effects, or real estate as a hail mary that my wealth won't be inflated to hell. Having central bank rates at 5+% below inflation is basically a nice way of asking people to desperately pump money into any speculative asset they can find before the roaring fire behind it incenerates it.
That seems like a non-sequitur to me. When "quantitative easing" occurs, the Fed buys Treasuries not because it lets the government spend more, but to reduce interest rates and encourage lending.
If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for. This creates permanent inflation/dilution of the currency.
> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for
Open market operations are one among many of the Fed's policy tools [1].
These are debt instruments. If the Fed buys UST, MBS, etc from the market, those assets will be serviced over time and the money will return to the Fed.
> those assets will be serviced over time and the money will return to the Fed
The comment I responded to [1] posited the Fed needing to engage in extraordinary tightening. Waiting for the debt to be repaid would be insufficient in that case. (Also, defaults unbalance the equation.)
In that case, the Fed would need to sell assets to draw cash out of the economy. My point was that if the Fed ran its balance sheet to zero, it would still have unlimited firepower in the form of slashing interest on reserves through zero, borrowing through repos and potentially even raising the reserve requirement. These are powerful tools. Too powerful for regular use, which is why the more-precise open market operations are preferred.
TL; DR Running out of room to tighten is not a problem for a central bank.
> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill.
I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point. The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year, as long as the labor market is doing well (which it seems like it is[1]) and folks can afford their mortgages. Of course house prices may deflate (~20%?) purely out of demand for such high prices decreasing, but imo it's unlikely we will see mortgages go underwater, and therefore the Fed doesn't really have a problem on their hands.
If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.
At 2.6%, 45% of your first payment goes toward the principal, and around 3.5 years into a 30 year mortgage you hit 50/50 split between the principal and interest.
At 5% interest, 22% of your first mortgage payment goes toward the principal and you only hit parity at around year 15-16.
At 10% interest rate, only 5% of your first mortgage payment goes toward the principal. You hit parity (50/50) around year 23.
Agreed. Home buyers 2017+ are pretty leveraged though. Any labor tightening will for sure increase foreclosures in this group. I don't see a run on mortgages. It is funny how people map the past to the future.
> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year
CDOs did not blow up the housing market. The housing market blew up the CDO market.
In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.
It was more like dominos falling than a feedback loop. It was poor / fraudulent mortgage underwriting standards which caused a housing bubble and subsequent collapse of house prices and increase in mortgage defaults. The CDO market provided a large part of the funding for those mortgages and suffered as a result. The panic over the CDO market's collapse caused a widespread credit crisis for anyone suspected of having exposures to CDOs, and then the US government decided to allow a major bank to fail due to credit crisis (Lehman Brothers). This was a terrible mistake that nearly caused the cascading failure of the entire financial sector and forced the US government to execute a huge bailout operation. The blame lies with the US government, for first failing to properly regulate the market, and then allowing Lehman Brothers to fail without understanding the consequences.
The consequences of the 2008 financial crisis reverberated for over a decade, and then COVID-19 pandemic arose and the government decided that it wasn't going to make the "same mistake" again and started bailing out everyone. However, they overshot, misallocated funds, caused runaway inflation, then failed to recognize the persistent inflation and acted too late to curb it. That brings us to today, where there is ongoing speculation about whether this will be a "soft landing" or a "hard landing." If history is any guide, then I think that this kind of market situation this means we can expect another spectacular crash in the near future. The consequences of the 2008 financial crisis and subsequent rescue operation were still unresolved when the pandemic began, because the Fed had not figured out how to unwind its bloated balance sheet from all those years of Quantitative Easing. Just when the Fed thought it would start unwinding, the pandemic hit, and the Fed balance sheet grew astronomically. Now, for the first time in decades, the Fed is facing the runaway inflation that "common sense" would have predicted, and they have no choice but to initiate a "rug pull" on the economy in order to bring inflation under control. This will only end when the US consumer is bruised badly enough to reduce consumption, which will put the economy into a tailspin which will cause massive wealth destruction for investors. It's hard to see how the Fed can keep kicking this can down the road. Somewhere along the way there will be a black swan event. Perhaps Russia will choose to escalate cyber, kinetic and/or economic warfare against NATO at the very moment that a US market crash is occurring.
I sincerely hope that I'm wrong, but my Spidey Sense is tingling like it's 2001 or 2008.
> CDOs did not blow up the housing market. The housing market blew up the CDO market.
The two were indistinguishable (CDOs == buckets of over-leveraged mortgages), so I'm not sure what your point is here. No one really knew/cared what was in those CDOs, so people were trading them at face value. I don't think recent home owners are even remotely as leveraged as they were in 2008, so we're not risking a cascading blow-up effect.
House prices went up because of QE + high demand. QT will decrease demand at such high prices, and thus lower prices; we're already seeing this happen due to interest rate hikes. Undoubtedly we'll see some foreclosures, but I don't think it will be a bloodbath.
>> The 2020 housing boom will not blow up like in 2008
This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.
"The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing"
How is this bad news? Housing is incredibly expensive relative to the average American's salary. Yeah it sucks for people that bought a house recently, but in the long term, it is absolutely a good thing.
This is how I see it as well. If clean drinking water doubled in price in 2 years would the same people go on CNBC and praise the gains in the "strong water market"?
I'd be more concerned about the other ~$6.3T of holdings in the Fed's ~$9T balance sheet.[a] The Fed has publicly announced it will allow its bond holdings to mature, to the tune of ~$90B/month, without recycling the proceeds back into treasury and agency-sponsored mortgage-backed bonds.
Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that is, mutual funds, ETFs, pension plans, individuals, etc. -- will have to buy an additional ~$90B of bonds every month, give or take, going forward.
That's $1T/year that private investors must find to buy treasury and agency bonds newly issued to refinance old ones.
Without a doubt, this will have a large, persistent effect on treasury yields and credit spreads.
> If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury.
Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it implying that treasury yields will rocket higher???
> In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.
If the Fed takes a loss, doesn't this mean that base money supply increases? Sure it will be drawing liquidity out of the system, but in the long run, it will leave more money in the system compared to where they started with QE.
> Why does this reduce the amount of funds to the treasury?
It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.)
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[ 5.0 ms ] story [ 139 ms ] threadThey want to stifle the demand so as to match supply better, but when it's a supply shock and the United States is short something like 3 million houses, it seems a fairly punitive and misguided way to approach solving the problem.
Rates rising drives prices down. Of the mortgages on their books. And of the homes collateralizing them.
Add six people. There are now five chairs and ten people. How can you manipulate the prices of chairs such that all ten people can have their own chair?
Artificially lowering the prices of chairs does not solve the underlying issue: There are not enough chairs for everyone that needs one.
By treating housing price surges as excessive demand (raising mortgage rates), you lower demand not only for _existing_ homes, but also for creating new homes. If your goal is to ensure that housing prices always go up and affordability/homelessness go in wrong direction, the Federal Reserve's policy is very effective.
They're wrong to prematurely kill demand before it can cause new housing construction to increase, fixing the underlying issue of not enough supply.
Price always going up makes chairs attractive to hold, which results in misallocation of chairs - ideally you want them to go to whoever wants chairs the most, not whoever grabbed a chair first.
Yes, the best answer is to make more chairs, but that is not something that the FED has much control over (it's federal/state/local zoning policy and regulation which prevent more supply).
The question the FED can address is not "how can we make sure everyone has a chair", but rather "how do we make sure that the existing chairs go to the people that need chairs the most"
There's still a supply shortage in building homes to deal with, but that'd at least solve a problem for a good chunk of folks.
The solution is to remove tariffs on imported wood to make new housing cheaper and to punish municipalities with racial segregationist-era housing/zoning policies.
There are places like Mountain View that don't allow building above four stories, which is crap, but stuffing people into towering buildings where they're not allowed to own the thing they're living in or immediately priced out of it (which serves as an investment) doesn't solve the housing crisis.
Edit:
I had a bit of a snarky reply, and I apologize if you read that. I pay a little over $3.5k for a house (that allows a big dog); if I lose this place I'll pay over $4k in rent per month and that number goes up by the month. I'm being forced to come into an office, which requires me to live near by. If I can't live near by, then I have to accept a lower paying job. Do you see the complexity of this issue?
This is misguided politic theatrics, that causes even more panic and over consuming due to panic, which leads to further stress and supply issues.
I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.
I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.
Less housing demand presumably means less home construction and renovation, which eases the strain on supply-chain limited resources. Lower home prices also reduce the amount of equity sellers, or HELOC borrowers, can spend on NFTs or whatever [1].
[1] https://en.wikipedia.org/wiki/Wealth_effect
Imagine an ad infinitum example. Let's say the price of gas goes to $1M a gallon. The fed then somehow removes every dollar from the economy. The price of gas is still going to be approaching zero when denominated in dollars after demand is forced to zero(in reality the price of gas would just change to be denominated in physical violence in this mad max scenario but that's an aside)
If someone want they can get a free lunch, no need to increase the rate but everyone else lowers inflation for them.
Which isn't really a problem... because it's impossible for the Fed to get called in the way a bank would if there's a housing crash.
But is probably less than ideal... as it's just weird to have the Fed holding that much mortgage debt directly.
There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.
"Balance sheet that never rolls off" is very much in the same genre as "loan that is actually a grant" and "financing tax cuts with debt."
edit: /s
In reality, all of those steps were necessary to prevent economic disaster, but now that disaster has been averted, and wages started rising, everyone's clutching their pearls about inflation.
In any case, the team sports side of this is much less interesting than the part that transcends team sports: both sides devote more media attention to the smaller money printers. Not by a small margin, either. That's an interesting choice. Does submarine go blub? Or does making the big money printer boring and complicated completely cloak it from view? Either way, it's an impressive multi-trillion dollar sleight of hand.
The assertion is not so much that poor people cause inflation; rather, that inflationary fiscal and monetary policies are often only recognized as such when they happen to benefit middle-to-lower income people.
Example: PPP Covid programs which pay business owners billions is necessary and proper given the circumstances, but direct payments to taxpayers is not because it will cause inflation.
In truth, they both provide relief, and they both contribute to inflation.
Assets have been artificially inflated for a very long time due to QE and low interest rates and the Fed's balance sheet.
If that were single handedly the reason for corn and lumber to get more expensive (general inflation) - we should've seen that a long time ago.
There's a lot going on - and it's hard to blame everything on the Fed. Rising inequality? Sure. General inflation? Not convinced.
When wages go up, it can either go at the expense of profits, or at the expense of prices (Or, most usually, both). The labour shortage in the pandemic created upward wage pressure, which added to existing pressure[1] caused by rising housing/healthcare costs.
Notice how interest rates went up, as unemployment hit an all-time low? Capitalists hate low unemployment, as it causes wages to go up. Raising interest rates cools off the market, reduces the number of speculative investments, and increases unemployment.
There's a reason that the government always wants a few million people to always be jobless. It puts the brakes on wage growth.
[1] This is most notable in resort towns. As housing prices went up, nobody who works a service job can afford to live in them anymore - so all the workers pack up, and move to the city. As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours. For some reason, tech folks vacationing in their lakeside dachas aren't keen on putting in a few hours at the local grocery.
If these were your only choices you were on the edge of profitability right before a global pandemic hit. Plenty of reasons for that. Commercial Rent Control is "progressive" and the people who own property like this can afford to let it sit vacant indefinitely and will literally abandon this amount of profit because they feel like it.
The problems with a debt crisis at the sovereign level is there is only one can left to kick and that's the inflation can. The government says they don't want inflation but if it comes down to real solvency issues, they are going to give in to inflation, if the choice is between that and defaulting.
We basically have been playing a liquidity shuffling game since the first tech bubble.
I think beyond that it's too many words to really get into?
from TFA: "The Fed's pandemic actions fueled a housing boom"
well thats part of the issue (pulling a mini tarp), but the other half of the story is the extraordinary steps taken way back in 2010 to keep people in their homes in the first place. The government wanted cake and they wanted to eat it too. Banks that over-leveraged and pandered predatory loans were never allowed to crash and burn; they were almost all bailed out through TARP. homeowners in turn who accepted these loans were also often gifted with TARP assistance that kept them in overvalued homes. auto-makers without customers were never made to reform, only a few token concessions and mergers here and there for companies with a track-record of dismal performance, and a well published cosmetic defect when executives from these conglomerates came with dog-eared pockets to congress on private jets.
Effectively, when the market ran out of gas, the federal government began expectorating ether into the air scoop of the economy like a wasteland war boy effectively trying to outrun any crash that didnt focus entirely on the poorest members of society.
That fix was just never paid for, in terms of shrinking Fed balance sheets and renormalizing rates.
Additionally, if you don't address the lack of regulation that allowed the collapses in 2008, which we absolutely did not, it will keep happening and those future occurrences will grow in severity. Since now, in order to 'make money', the frauds have to be bigger, faster, and more aggressive.
What does that even mean?
Do you mean it in a philosophical sense similar to the idea that every company will eventually go bankrupt given enough time? Any major crisis is capable of bringing down banks, its inherently a feature of fractional reserve banking but the benefits have so far outweighed the risks.
Selling these does not effect the housing market any differently from the Fed selling some other bond.
If the market will pay yield X for a long-term bond of a certain duration, banks can make money by offering mortgages for X plus some margin.
The Fed selling MBSs should just depress yields in general.
I think if the Fed announced they were selling agency MBS as part of their QT program we would see a paradigm shift in markets. Like limit down kind of days. I think that's what the punch bowl being taken away truly looks like.
And if the S&P down 35% doesn't get inflation down, then I think that's probably next on the list.
This isn't how it works.
No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when lowering rates. It will always lose money when raising them. This is close to mathematical fact.) The Fed can't go broke. Its operating metrics are inflation and unemployment.
> the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates
This is the real issue. But it's why we have an independent central bank. Nobody likes rate rises. It's why economies with weak institutions wind up hyper inflating. (No, we're not.)
For "homebuilders, real estate agents, and other influential industry groups," there is unlikely an upper bound to the support they feel they need.
I like rate rises. And I'd like a central bank run by people who didn't default to "nobody likes rate rises" thinking.
This article is literally about them printing money to buy private assets...
their job is to protect the big banks, the rest is window dressing for TV-americans
Open market operations are one among many of the Fed's policy tools [1].
[1] https://www.frbsf.org/education/teacher-resources/what-is-th...
The comment I responded to [1] posited the Fed needing to engage in extraordinary tightening. Waiting for the debt to be repaid would be insufficient in that case. (Also, defaults unbalance the equation.)
In that case, the Fed would need to sell assets to draw cash out of the economy. My point was that if the Fed ran its balance sheet to zero, it would still have unlimited firepower in the form of slashing interest on reserves through zero, borrowing through repos and potentially even raising the reserve requirement. These are powerful tools. Too powerful for regular use, which is why the more-precise open market operations are preferred.
TL; DR Running out of room to tighten is not a problem for a central bank.
[1] https://news.ycombinator.com/item?id=31428385
I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point. The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year, as long as the labor market is doing well (which it seems like it is[1]) and folks can afford their mortgages. Of course house prices may deflate (~20%?) purely out of demand for such high prices decreasing, but imo it's unlikely we will see mortgages go underwater, and therefore the Fed doesn't really have a problem on their hands.
[1] https://www.nytimes.com/2022/05/06/business/economy/jobs-rep...
Which is indeed the last shoe that has yet to drop in the current recession.
At 2.6%, 45% of your first payment goes toward the principal, and around 3.5 years into a 30 year mortgage you hit 50/50 split between the principal and interest.
At 5% interest, 22% of your first mortgage payment goes toward the principal and you only hit parity at around year 15-16.
At 10% interest rate, only 5% of your first mortgage payment goes toward the principal. You hit parity (50/50) around year 23.
CDOs did not blow up the housing market. The housing market blew up the CDO market.
In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.
Both statements are correct because there was a feedback loop.
The consequences of the 2008 financial crisis reverberated for over a decade, and then COVID-19 pandemic arose and the government decided that it wasn't going to make the "same mistake" again and started bailing out everyone. However, they overshot, misallocated funds, caused runaway inflation, then failed to recognize the persistent inflation and acted too late to curb it. That brings us to today, where there is ongoing speculation about whether this will be a "soft landing" or a "hard landing." If history is any guide, then I think that this kind of market situation this means we can expect another spectacular crash in the near future. The consequences of the 2008 financial crisis and subsequent rescue operation were still unresolved when the pandemic began, because the Fed had not figured out how to unwind its bloated balance sheet from all those years of Quantitative Easing. Just when the Fed thought it would start unwinding, the pandemic hit, and the Fed balance sheet grew astronomically. Now, for the first time in decades, the Fed is facing the runaway inflation that "common sense" would have predicted, and they have no choice but to initiate a "rug pull" on the economy in order to bring inflation under control. This will only end when the US consumer is bruised badly enough to reduce consumption, which will put the economy into a tailspin which will cause massive wealth destruction for investors. It's hard to see how the Fed can keep kicking this can down the road. Somewhere along the way there will be a black swan event. Perhaps Russia will choose to escalate cyber, kinetic and/or economic warfare against NATO at the very moment that a US market crash is occurring.
I sincerely hope that I'm wrong, but my Spidey Sense is tingling like it's 2001 or 2008.
The two were indistinguishable (CDOs == buckets of over-leveraged mortgages), so I'm not sure what your point is here. No one really knew/cared what was in those CDOs, so people were trading them at face value. I don't think recent home owners are even remotely as leveraged as they were in 2008, so we're not risking a cascading blow-up effect.
House prices went up because of QE + high demand. QT will decrease demand at such high prices, and thus lower prices; we're already seeing this happen due to interest rate hikes. Undoubtedly we'll see some foreclosures, but I don't think it will be a bloodbath.
This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.
How is this bad news? Housing is incredibly expensive relative to the average American's salary. Yeah it sucks for people that bought a house recently, but in the long term, it is absolutely a good thing.
Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that is, mutual funds, ETFs, pension plans, individuals, etc. -- will have to buy an additional ~$90B of bonds every month, give or take, going forward.
That's $1T/year that private investors must find to buy treasury and agency bonds newly issued to refinance old ones.
Without a doubt, this will have a large, persistent effect on treasury yields and credit spreads.
[a] https://fred.stlouisfed.org/graph/?g=PlId
Yes.
> this will have a large, persistent effect on treasury yields and credit spreads
That's the point.
Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it implying that treasury yields will rocket higher???
> In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.
If the Fed takes a loss, doesn't this mean that base money supply increases? Sure it will be drawing liquidity out of the system, but in the long run, it will leave more money in the system compared to where they started with QE.
It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.)
[1] https://www.stlouisfed.org/on-the-economy/2018/september/fed...
[2] https://www.wsj.com/articles/fed-sent-88-5-billion-in-profit...