05 Jun The future of home prices and mortgage rates

Q. What effects will the unwinding of the Federal Reserve’s holdings of mortgage-backed securities have on home prices and interest rates?
— Homeowner

A. The Federal Reserve is the largest buyer of government-backed mortgage backed securities (MBS) and owns about a third of the total market for them today.

At some point the Federal Reserve will probably start to exit this market, so it’s reasonable to ask how that might impact financing costs for homebuyers, said Andy Kapyrin, director of research at RegentAtlantic in Morristown.

Along these lines, it’s important to ask how much the Fed’s intervention actually reduced the rates on mortgages.

Kapyrin said one way to measure the impact is to look at the difference between the rate on a conventional 30-year mortgage and compare it to the yield of a long-term government bond.

He used the 10-year Treasury bond as an example.

The Fed started buying MBS in November 2008, Kapyrin said, and since then, mortgage rates have been 1.76 percent higher than Treasury bonds.

“In the ten years prior to the crisis when the Fed was not doing unconventional monetary policy like buying MBS, the mortgage rates were 1.87 percent higher than Treasury bonds,” he said. “The Fed’s bond buying program did not have much of an impact on the spread between mortgage rates and treasury bond yields.”

Does that mean that the Fed has no effect on financing costs?

Absolutely not, Kapyrin said.

“The Fed has had a significant impact on the overall level of interest rates, and as it removes some of the extraordinary programs from the Great Recession, we can expect interest rates to rise overall,” he said. “But, the analysis suggests that mortgage rates won’t likely increase by more than any other longer term loan/bond rates.”

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This post was first published in June 2017.