Is The Fed To Blame For High House Prices? 2
in theory, the Fed’s MBS purchases should be the main driving factor behind high housing prices, but is that the case in reality?
Or is some other factor driving today’s red hot housing market?
Let’s take a look at where it all begins – banks making mortgages.
From the chart below, it is obvious that in terms of making new mortgages, Covid didn’t slow mortgage lenders down at all.
While the total amount of mortgages are now higher than they were before the Great Financial Crisis, YoY growth rates are nowhere close to what they were in the leadup to ‘08.
That being said, growth rates are at the highest they have been since the 2nd quarter of ‘08, when the crisis started to pick up steam.
This is mirrored in the data for Agency Mortgage Backed Securities (MBS) issuance.
From the chart above, you can see that since March ‘20, issuance of Agency MBS has roughly doubled, from ~$170 billion to a high of ~$385 billion in April ‘21, falling to about $300 billion in May.
Issuance has been above $300 billion for 11 consecutive months now, beginning in July ‘20. If June’s figures also come in above 300, that would make a full year.
For context, year to date issuance from Jan to May in 2021 stands at about $1.7 trillion, which is equal to the entire amount issued in 2019!
Is it any wonder then, that the housing market in the United States is booming?
The chart above quite clearly illustrates the pandemic boom in US house prices, at least when seen from the national level, with the index at record highs and YoY growth rates back at pre ‘08 highs.
Whether this is a bubble or not, as well as what risks this massive run up in house prices pose to financial stability is another discussion, but whatever one thinks about these issues, it is obvious that something changed at right about the time of the onset of the pandemic.
That something is the Fed, or more specifically, the Fed purchasing MBS as part of their latest round of QE, implemented to “stimulate” the economy back to growth.
As the rightmost highlighted area of the chart shows, the rise in housing prices over the past year has coincided with the Fed’s purchases of MBS.
This relationship is corroborated by the increase in total mortgage lending (from all lenders) and the increase in Agency MBS issuance over the same period of time, as illustrated in earlier charts.
However, it is important to note that MBS purchases alone do not lead to a stronger housing market.
A good example is when the Fed first started purchasing MBS as part of QE 1, way back in 2009. This period of time is highlighted on the leftmost portion of the chart above, and quite clearly shows that a spike in the Fed’s MBS holdings did nothing for US national house prices.
The reason for this can be found in the chart of US Total Mortgages at the beginning of this article, where mortgage lenders were cutting back on making new loans between 2009 and 2014. Drastically so in 2009 – 2010, when QE 1 was implemented.
Also, looking at the years between 2014 and 2018 (the highlighted portion in the middle of the chart), we see that house prices increased even as the Fed held its MBS holdings steady, to the point of letting them fall in 2019.
Again looking at the chart of Total Mortgages, we see that this period of time is when lenders started to increase their mortgage lending from off their post ‘08 lows.
Consequently, mortgage lending is a more important driver of house prices than Fed MBS purchases.
We are currently seeing record highs in the national home price index as this round of MBS purchases were, crucially, implemented during a period of time where mortgage lenders are growing their loan volumes.
At the end of the day, it always seems to come back to bank lending over central bank intervention, doesn’t it?
To be continued…
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