Fed Nearing End of Mortgage-Buying Orgy — Could Affect Rates and Real Estate in Miami and Coral Gables

posted on March 7th, 2010 filed under: Financial Responsibility, Real Estate News

The Federal Reserve is supposed to stop buying mortgage-backed securities (MBS) at the end of this month, which could lead to higher mortgage rates as private buyers demand a higher return for MBS risk.  As a chart by financial blogger Calculated Risk illustrates, MBS are now the single biggest chunk of Fed holdings, far outstripping the Fed’s position in U.S. Treasury securities.

Try to wrap your mind around that.  Before 2008, the Fed held no MBS.  Banks and Wall Street firms packaged the stuff and sold it to private buyers.  Once real estate was revealed to be a fraudulent Ponzi scheme, the private buyers vanished.  But the Fed stepped in, printing dollars out of thin air to buy what nobody else wanted, thus keeping the mortgage market from completely shutting down.

The result is that the Fed, which started 2008 holding well under a trillion dollars in U.S. Treasuries and little else, is putting the finishing touches on a buying spree that will leave it with $1.25 trillion in MBS.

Economists are divided on how much the Fed’s departure from the MBS market will cause mortgage rates to rise.  And real-estate brokers can spin the prospect of rising rates as a reason to buy now.

See both sides.  If homes in Miami and Coral Gables are more affordable now while the Fed artificially depresses mortgage rates, homes might be worth less if rates go up.  Indeed, rising rates played a significant part in the bursting of the bubble.  So if you buy that property in Miami or Coral Gables today while rates are low, be prepared for the possibility of its losing value as rates rise and affordability drops.

The risk would be less if incomes could be expected to rise in tandem with rates and thus support affordability.  While possible, such an outcome is no sure thing.

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Update 02/13/10:  See Feb. 13, 2010 post titled “With Fed Ending Mortgage Purchases, Fannie and Freddie Step In — What It means for Real Estate in Miami and Coral Gables

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