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Uncertainty over the Federal Reserve’s next moves is disrupting the housing sector and threatening to send the U.S. economy into a tailspin, three prominent real estate industry trade groups warned in a letter Monday. In it, they urged Fed policymakers to promise that they’re done hiking rates and have no plans to sell trillions of dollars worth of mortgage bonds that the central bank bought during the pandemic.
The joint letter from the Mortgage Bankers Association (MBA), National Association of Realtors (NAR) and National Association of Home Builders (NAHB) echoes concerns voiced on national television last week by MBA CEO Bob Broeksmit.
In a CNBC appearance Wednesday, Broeksmit urged Fed policymakers to “be clear that they’re done with rate increases” and to also “make clear that they’re not going to sell mortgage-backed securities off their balance sheets.”
In an attempt to keep the economy from crashing during the pandemic, the Fed not only brought short-term interest rates down to nearly 0 percent but bought trillions of long-term Treasurys and mortgage-backed securities (MBS) to bring interest rates down and encourage borrowing.
Fed has trimmed $1 trillion from balance sheet
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis
Mortgage rates dropped to historic lows until the Fed began tightening last year — not only by raising short-term interest rates but by trimming its massive holdings of government bonds and MBS.
So far, the Fed hasn’t sold any of those assets — it’s just allowing up to $60 billion in maturing Treasurys and $35 billion in MBS to roll off its books each month without replacing them.
But the fear that the Fed will actually sell MBS in the open market has widened the “spread” between 10-year Treasurys and mortgage rates, meaning mortgage rates are even higher than they should be, Broeksmit told CNBC.
Now NAR and NAHB have joined with the MBA in voicing those concerns, in writing, to Fed leaders.
“The difference between the current spread and the long-run average indicates mortgage rates for homebuyers across the country that are at least 120 basis points higher than they otherwise would be,” the trade groups said. “In other words, the uncertainty-induced mortgage-to-Treasury spread is costing today’s homebuyers an extra $245 in monthly payment on a standard $300,000 mortgage. Further rate increases and a persistently wide spread pose broader risks to economic growth, heightening the likelihood and magnitude of a recession.”
The Fed did not immediately respond to Inman’s request for comment.
Most Fed policymakers signaled last month that they think the Fed will need to raise short-term interest rates at least one more time this year, and several — including Powell — have said they expect the Fed will have to pursue a “higher for longer” rate strategy to keep inflation in check.
Historically, Fed leaders have said that in trying to achieve the central bank’s dual mandate of fostering maximum employment while keeping inflation at bay, they make decisions based on the data that’s available to them.
But in a message to MBA members last week following his CNBC appearance, Broeksmit suggested that the group does have the ear of Fed policymakers.
“We are in regular conversation with senior leadership at the Fed and share real-time market color on both residential and commercial lending,” Broeksmit said in an email to members. “The state of the housing and real estate finance markets is key to the Fed’s overall outlook for the economy, and they constantly seek such market color from us. One thing we have gathered from this ongoing engagement is that they are keenly aware of how difficult housing market conditions are.”
Broeksmit also explained that, in his view, “Fed policy alone is not responsible for the recent rate instability,” saying Congress “must take steps to restore budget discipline and effective policymaking.”
The most recent rate spikes “started when Fitch downgraded the U.S. credit rating following the debt limit crisis and continued with the increase in Treasury issuance needed to cover growing deficits,” Broeksmit wrote. “Ongoing gridlock on Capitol Hill, including a ‘near miss’ government shutdown last week, continues to be a concern for financial markets, further driving up the price of government debt.”
The MBA, he said, “will continue to urge policymakers to stop the shutdown threats and come together to address budget and spending priorities that restore fiscal discipline.”
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Email Matt Carter