Sep192013

How will the Federal Reserve’s continued printing money impact housing?

I recently asked, Can the fed taper housing market stimulus with no ill effects?. Apparently, the federal reserve doesn’t think so. Last month I reported that rising interest rates are spoiling efforts to reflate the housing bubble. The weakness in the market is apparent to everyone since mortgage rates rose, and since the banks need continued rapid appreciation to bail out their bad bubble-era loans, a cooperative federal reserve decided not to taper its bond and MBS purchases.

I can’t say I’m surprised. The federal reserve won’t stop printing money or raise interest rates until it absolutely has to. That is the history of this organization. Unless inflation gets out of control or the currency starts to strongly devalue relative to other currencies, the federal reserve will keep printing money or lowering rates until one of those two events forces them to do otherwise. Slowing down the printing of money might have been the prudent thing to do, but until they’re forced to, don’t expect the federal reserve to stop printing or raise rates.

Fed shocks market, decides not to taper

Rising mortgage rates halt beginning of QE wind down

Christina Mlynski — September 18, 2013 2:17PM

The Federal Open Market Committee decided Wednesday to keep purchasing additional agency mortgage-backed securities at its current pace to foster the ongoing housing recovery and fight unemployment.

In other words, the market was tricked — no tapering just yet — despite numerous predictions of a $10 billion reduction in monthly asset purchases by the Fed.

The FOMC made that conclusion after members met this week and announced that although the housing sector is strengthening, “mortgage rates continues to rise further and fiscal policy is restraining economic growth.”

Before everyone gets excited about lower mortgage rates, I want to point out that such an outcome is not a given. First, buyers may not get too excited about jumping into an asset class (bonds) they know is completely dependent upon federal reserve support. The same issues that caused investors to bail in May are still present today. I expect a short-term move lower, but after a few days of digesting the information, markets may decide otherwise. Many investors may see this as a selling opportunity because they know there will be buying interest to sell into and get a better price. The foreign central banks who own huge bond holdings and were recently selling may increase their sales. There is still little reason to buy 10-year Treasuries.

Further, the federal reserve still has the bigger dilemma of maintaining control of long-term rates. If they print too much money for too long — and nobody knows where that threshold lies — inflation expectation will cause investors to sell. If we reach that point, nothing the federal reserve does works. If they stop buying, bond prices crash and interest rates rise. If they keep buying, inflation expectation brings out sellers, bond prices crash, and interest rates rise. Apparently, we haven’t reached that magic threshold yet, but if we do, interest rates can rise very quickly.

The impact on housing is straightforward. Rising rates will hurt housing sales and ultimately prices. Falling rates will help housing. As I pointed out future housing markets will be very interest rate sensitive.

As a result, the central bank will continue purchasing agency MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion a month. Yields on 10-year Treasurys dipped from a daily high of 2.9% to below 2.8% on the news. Yields on Fannie Mae and Freddie Mac bonds also dropped, according to Bloomberg, with spreads between MBS and the 10-year swap winding 6 basis points closer.

“The committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy,” FOMC members said.

They added, “However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

Over the last several weeks all of the talk was about why the federal reserve must taper and how they would do it. The analysts were all wrong.

The vote for the statement was 11 to 1 with Esther George, president of the Federal Reserve Bank of Kansas City dissenting because she was concerned that the continued high level of bond-buying program increased future economic risks.

The majority of mortgage analysts noted that the Fed’s decision to not begin scaling back its monetary stimulus wasn’t bad news — it was just not what was desired.

Concerns over budgets, deficits and payments along with other news are tending to keep consumer and business confidence from expanding as rapidly as one would expect,” explained National Association of Realtors economist Jed Smith.

It could also be concerns over the soundness of our currency and the ongoing economic malaise that prevents consumer and business confidence from improving.

He added, “Currently, existing-home sales are at levels significantly above those of last year and should remain positive for the foreseeable future – in terms of sales and price. Given interest rates, household formations and gradually easing conditions most economists project increasing growth.”

As the NAr economist, he had to put in some spin and bullshit.

I don’t believe we will see both price and sales increasing over the winter unless we see a return of sub-4% interest rates. Do you believe this announcement will cause interest rates to fall that far?

The decision not to start tapering reflects the Fed’s view on the health of the overall economy, specifically the state of the housing market.

I thought we were in the midst of a raging bull market built on solid fundamentals? Isn’t that the story embraced by bulls and popularized in the MSM? Apparently, the federal reserve doesn’t think so, or they wouldn’t have explicitly said so in their decision not to taper.

Trulia (TRLA) chief economist and vice president of analysts Jed Kolko believes the central bank’s choice to not begin winding down its MBS purchases for two reason.

“Mortgage rates will rise less, or fall more, than if they had started tapering, and economic growth should be faster with the tapering delay, which could help housing demand if young adult’s job prospects improve,” Kolko noted.

In other words, the federal reserve wanted to keep the pedal to the metal.

In August, FOMC members confirmed that they were ‘broadly comfortable’ with the timeline Fed chairman Ben Bernanke put into action for tapering its monetary stimulus as long as economic conditions continued to improve.

However, with a volatile market since May into September, changing the pace of asset purchases did not seem appropriate given the recent rise in mortgage rates, drop in refinance volumes and debate over who will head the Federal Reserve.

Overall, the Federal Reserve has been committed to low rates for some time and the recent announcement is a continuation of that.

Ultimately mortgage rates will continue to drift upwards, with some downward pressure on price increases,” pointed out Cato Institute director of financial regulation studies. Mark Calabria

I believe mortgage rates will resume their upward trend after a brief pullback.

He concluded, “Mortgage rates also incorporate inflation expectations, so to the extent the Fed does not keep those expectations in line, rates will also increase.”

That is the nightmare scenario the federal reserve most worries about.

So what are your predictions on mortgage interest rates? It should make for amusing quotes from the archives several months from now. Do you have the courage to go on record?

How to spend your home in four easy steps

The owners of today’s featured short sale will end up leaving the property with nothing. They are one of the many sellers who were underwater until prices rose over the last year, so now they are hoping to make a graceful exit and move into a rental. This is particularly sad given that they’ve owned the property for 21 years.

The bought it back in 1992 for $313,000. I don’t have their original mortgage data, but they obviously borrowed less than they paid. Their four steps toward losing their home are as follows:

  • On 4/3/2001 they refinanced with a $316,000 first mortgage. This wiped out nine years of amortization and extracted their down payment.
  • On 6/1/2002 they obtained a $37,665 HELOC.
  • On 2/10/2004 they refinanced with a $450,000 first mortgage and obtained a $80,000 stand-alone second.
  • On 6/29/2007 they refinanced with a $651,000 first mortgage.

Twenty-one years, and rather than being close to paying off their original mortgage, they are about to sell short and leave with no equity and bad credit.

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[idx-listing mlsnumber=”PW13178840″ showpricehistory=”true”]

5 ELDORADO Lake Forest, CA 92610

$700,000 …….. Asking Price
$313,000 ………. Purchase Price
8/13/1992 ………. Purchase Date

$387,000 ………. Gross Gain (Loss)
($56,000) ………… Commissions and Costs at 8%
============================================
$331,000 ………. Net Gain (Loss)
============================================
123.6% ………. Gross Percent Change
105.8% ………. Net Percent Change
3.7% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$700,000 …….. Asking Price
$140,000 ………… 20% Down Conventional
4.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$560,000 …….. Mortgage
$142,320 ………. Income Requirement

$2,854 ………… Monthly Mortgage Payment
$607 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$146 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$70 ………… Homeowners Association Fees
============================================
$3,677 ………. Monthly Cash Outlays

($623) ………. Tax Savings
($731) ………. Principal Amortization
$237 ………….. Opportunity Cost of Down Payment
$108 ………….. Maintenance and Replacement Reserves
============================================
$2,668 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,500 ………… Closing Costs at 1% + $1,500
$5,600 ………… Interest Points at 1%
$140,000 ………… Down Payment
============================================
$162,600 ………. Total Cash Costs
$40,800 ………. Emergency Cash Reserves
============================================
$203,400 ………. Total Savings Needed
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