Even if the Federal Reserve engineers a soft landing
... the bank’s monetary policy during and after the pandemic will distort the housing market for years to come.
In the spring of 2020, as the world was in full pandemic panic and the US economy was in free-fall, the Federal Reserve turned to the emergency playbook from the financial crisis:
It cut interest rates to zero and restarted quantitative easing, buying up longer-dated Treasuries and mortgage-backed securities, known as MBS.
This time, however, it went much bigger — expanding its balance sheet to $8.9 trillion in 2022, compared to $2 trillion in 2009.
The result was record-low mortgage rates and $8 trillion worth of mortgage originations in 2020 and 2021, as people bought homes and refinanced at the historically low rates.
Because the US has 30-year fixed rate mortgages, many Americans are still benefiting from the low rates.
More than half of homeowners now have mortgage rates below 4%.
They will not be moving anytime soon. That means less inventory, so new buyers are facing higher prices to go with higher mortgage rates.
This is likely to remain the case for years — because odds are, mortgage rates will never return to pandemic levels.
Allison Schrager Bloomberg 15 October 2024
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