Why the Housing Market Recovery Could Take Longer Than You Think

  • The Fed’s buying spree of mortgage-backed securities has driven interest rates to historic lows.
  • Forbearances have saddled lenders with a $1 trillion burden.
  • Lenders are coping by imposing stricter borrower conditions that will inhibit the housing market’s ability to sustain a recovery.

The Federal Reserve’s response to the pandemic has driven mortgage interest rates to lows the housing market has never seen.

But while the government intended to stave off a crisis in residential real estate, the central bank’s efforts have produced some unexpected consequences.

The Fed Is Buying Boatloads of Mortgage-Backed Securities

As part of the Fed’s efforts to keep the U.S. economy afloat, the central bank has been busy buying mortgage-backed securities (MBS). These securities are composed of mortgages bundled together and sold as an investment vehicle.

In recent weeks, the Fed’s MBS buying activity has outpaced purchases during the housing market crisis in 2008.

Fed’s MBS purchases accelerate to the highest level in 12 years. | Source: Crescat Capital via Twitter

The central bank’s aggressive purchase activity is inflating the price of mortgage-backed securities and driving interest rates down.

A look at the 30-year fixed-rate mortgage market reveals that interest rates stand at a historic low of 3.24%. For 15-year fixed-rate loans, the average rate has fallen to 2.7%.

Mortgage rates are now at record lows. | Source: FRED

Plummeting interest rates should theoretically whip up demand and ignite a new bull cycle in the housing market.

But the government’s actions have created an environment where lenders are reluctant to approve loans for all but the most qualified applicants.

The March Relief Bill Created a Credit Crunch in the Housing Market

At the height of the pandemic, Congress enacted a bill that allowed homeowners to defer payments for up to a year without penalty. The policy left mortgage servicers with very little choice but to take on the burden.

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