The Fed’s decision to not increase the Fed Funds Rate from the 1-1.25% range was no surprise. It did shock the financial markets that they aren’t going to kick the can down the road, and will start to do their Quantitative Tightening this October.
Here are the facts to wrap your head around:
Starting in 2008, when it was perceived that reduction of the Fed Funds rate to 0 wouldn’t be enough to pull the country out of the recession, the Federal Reserve conducted four rounds of Quantitative Easing (QE), buying enormous amounts of US Treasuries and Mortgage Backed Security (MBS), forcing the long side of the interest rate yield curve down. This essentially artificially lowered mortgage rates down to historically low rates, stimulating the real estate market, and the general economy.
Ultimately the Fed’s balance sheet has grown to $4.5 trillion, in which $1.8 Trillion are Mortgage Backed Securities. It is perceived by the Fed that the Fed’s purchases contributes to a full 1% reduction in mortgage rates. The Fed owns 35% of all mortgage backed securities!
The Fed stopped doing the QE October 29, 2014, but continued to repurchase treasuries and mortgages with principle repayments (mortgages refinanced, houses sold, principle payments received, treasuries maturing, etc). This still maintains the Federal Reserve as the #1 buyer of treasuries and mortgage backed securities. The mortgage side of the repurchase has been approx. $25 Billion a month.
The Quantitative Tightening is not an outright sale of the holdings in the balance sheet, but a reduction in the repurchase of the securities, as funds are received. The reduction in repurchases will be $10 Billion mo, in which $6 Billion will be in treasuries, $4 Billion in Mortgages. The reduction is slated to be increased by $4 Billion each quarter till hitting a maximum reduction of $20 Billion. There is not plan to outright sale the securities.
Fed Chair Janet Yellen conveyed during the Q&A that the Fed will use the Fed Funds Rate as the go to tool to make monitary adjustments. There is NO plan to use QE again, but it is a tool that can be utilized, but only if economic conditions warrants it.
My take away… Over time mortgage rates will go up. The private sector would have a lot of security buying to make up, as you remove the #1 buyer. Back to supply and demand. The QE did work, but is not causing a real estate bubble in prices. That’s being caused by inadequate supply of housing inventory. Waiting to purchase real estate, or refinance would not be productive.
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me.
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals
BRE #00905793 NMLS #310358
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth