Why Should I Care If The Fed Tapers?

There are a lot of projections flying around right now as to when the Fed is going to start tapering and pulling back on the high liquidity in our market.  It was assumed their August Jackson Hole meeting would be when we would get the announcement.  Now based on recent comments of “substantial further progress towards goals is needed” and “not seeing enough progress on maximum employment to warrant tapering”; many have pushed out the projection until early 2022.  While guessing “when” is as much fun as trying to hit the piñata with my eyes covered; it ultimately doesn’t matter.  What we know is it needs to happen.  Our current market is artificially pumped up with liquidity keeping our rates low and values high. Acknowledging the possibility, many are saying; well if the Fed tapers, so what?

​The Fed acknowledges purchasing $80 billion a month in Treasuries and $40 billion per month in Mortgage-Backed Securities.  What they don’t talk about is the amount they “repurchase”.   The Fed has a massive balance sheet of mortgages that they hold and receive principal payments and payoffs when the home is sold or refinanced.  Instead of just receiving these payments, the Fed has been reinvesting all of them back into Mortgage-Backed Securities. When looking at how much they really purchase each month, inclusive of these reinvestments, it looks less like $40B and more like…

• July $99B
• June $109B
• May $132B
• April $122B
• March $118B

So the Fed tapers, so what?  Why do yo care? Based on these purchases and estimates for 2021 mortgage volume originated; the Fed would have an estimated 43% ownership position. So.. when they eventually start tapering and eventually step out completely, what happens to the market?  At a 43% backing by the Fed, it’s no wonder rates are staying low.

​Today’s phenomenally low rates are a product of the pandemic and the actions of the Fed… we already know that.  But when they start going up, they will go up in a market that is continuing to appreciate… due to strong demand fueled by birth rates and government homebuyer programs: tight supply due to institutional investors, build-to-rent neighborhoods, and sellers being rate locked; and of course increased costs to build driving up the cost to the consumer.

Bottom line, higher prices-higher rates puts our buyers in a tougher financial situation.  Helping our clients buy today isn’t a “good idea”, it’s game changing!

No Relief in Rents

Rent growth maintained widespread momentum in June, with the Zillow Observed Rent Index (ZORI) up 1.8% month over month, pushing typical U.S. rents to $1,799/month in June. A strong recovery in the rental market over the past few months pushed year-over-year rent growth up 7.1% — the largest annual increase in the series’ history reaching back to 2015. Even discounting a weakened market last year, rents have risen 5.1% since March, the fastest quarterly growth in Zillow’s data.

Invitation Homes also was quoted as raising their rents on new rental leases by as much as 14.6% and 5.8% for renewals.

[author] [author_image timthumb=’on’]https://www.theruethteam.com/wp-content/uploads/2020/11/testimonial_image.jpg[/author_image] [author_info]Nicole Rueth has been passionately advising clients on their wealth building and home financing strategies for over 17 years. Her path has been non-conventional and it is a benefit to her clients.  www.TheRuethTeam.Com.[/author_info] [/author]