Two Pins Threatening Multiple Asset Bubbles, Part II

Stability, Two Pins Threatening Multiple Asset Bubbles- Part II

Rising House Prices

The Fed is purchasing $40 billion in mortgages a month. As a result, mortgage rates and spreads are at or near historic lows. The benefit of lower mortgage rates is greater affordability for buyers. While that helps everyone, low rates also drive up home prices.  Per the Case-Shiller 20 City Composite Home Price Index, home prices are up nearly 17% since the Fed started buying mortgages in early 2020.

As an aside, higher prices often result in higher rent payments. As shown below, we are just starting to see rent prices pick up following the surge in home prices.

Stability, Two Pins Threatening Multiple Asset Bubbles- Part II

Who benefits more from rising home prices, the wealthy or the poor? Who tends to rent more, the wealthy or the poor? Fed policy directly supports the housing market, and its benefits are overwhelmingly bestowed upon the wealthy.

Jerome Powell acknowledged the surge in home prices in his latest press conference but quickly refuted the blame. Oddly, he had no intelligent answer for why the Fed is buying $40 billion worth of mortgages monthly and driving mortgage rates lower, ergo prices higher.   

Tapering MBS QE

The pressure on the Fed to decrease their support of the mortgage market is heating up. Even the Fed seems to recognize it.

Boston Fed President Rosengren said, “the mortgage market probably doesn’t need as much support now.” Similar to comments from Dallas Fed President Kaplan, it seems Rosengren is indirectly pushing for a tapering of MBS-QE.

There is little doubt, more pressure on the Fed will arise from the media and politicians if home prices continue to soar. We would not be surprised if the Fed begins to taper MBS purchases as early as the June 15-16, 2021 FOMC meeting.

A Ray of Honesty at the Fed

The potential sources of financial instability are soaring real estate valuations and broad asset market valuations. On May 6, 2021, Fed Governor Lael Brainard, the board’s financial stability committee head, spoke with brutal honesty about financial markets and financial stability. To wit:

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