Is The Fed To Blame For High House Prices? 3
As record US housing prices fuels talk of another housing bubble and growing calls for the Fed to end its MBS purchases, an important development has been overlooked.
That is, amidst all the clamor, banks are making mortgages, but are unwilling to hold on to them.
What are the implications of this?
As shown previously, mortgage lending has been growing at an increasing rate over the past year, and at a level that is the strongest since the 2008 financial crisis (13 year highs).
While growth rates are still far below what they were in the lead-up to the crisis, the total amount of mortgages in the financial system has surpassed its pre-crisis high.
All of which makes sense given how quickly, and by how much, US house prices have risen over the course of the pandemic.
However, there has been a shift in banks’ underlying behavior with regards to the mortgages that they make, which could signal a growing sense of caution, or maybe even outright risk aversion.
At the beginning of the pandemic, banks were willing to make new mortgages and keep them on their balance sheets, which can be observed in the chart below, where total mortgages held by US banks continued to move higher.
This continued until sometime in the third quarter of 2020, when banks began to hold less of the mortgages that they were originating.
We know this because as the first chart illustrates, total mortgages over the course of the last 12 months have continued to increase, which means that the banks were still making mortgages, they were just offloading them to someone else as quickly as they could.
This is further demonstrated by falling growth rates in the chart above.
The amount of mortgages held by US banks on their balance sheets has grown at sharply slower rates over the past six months, turning negative in the first quarter of 2021 for the first time since 2013.
Comparing total mortgages held by US banks and Government Sponsored Enterprises (GSEs), we can see that in the previous 2 quarters (4Q 2020 and 1Q 2021), the amount held by banks began to dip, while that held by GSEs began to trend higher.
Growth rates illustrate this even more clearly, with the rate of growth in banks’ mortgage holdings decelerating sharply in 4Q 20 and 1Q 21, while that of GSEs accelerated sharply.
To be concluded…
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