The Housing Party Is Starting to Wind Down

With demand waning and supplies increasing, the housing market is in for a lot of pain. Low interest rates have been a boon to housing, making mortgages more affordable and allowing consumers to refinance existing loans, with many of them tapping the equity in their homes for extra cash. In the third quarter of 2021, loans for refinancing totaled $512 billion, compared with $442 billion for purchases.

But the Federal Reserve is tightening monetary policy, and rates on 30-year fixed-rate mortgages have already risen from 2.82% in February 2021 to a recent 3.84%. Also, the spread between those mortgage rates and yields on 10-year U.S. Treasuries to which they are linked has risen from 1.4 percentage points in May to 1.9 percentage points, suggesting that mortgage rates will continue to rise faster than Treasury yields. Furthermore, the central bank was a massive buyer of mortgage-backed securities, purchasing some $2.7 trillion during the last cycle, or 23% of the amount outstanding. As it concludes those purchases in March and then, very likely, begins to sell what it holds, the negative effects on the mortgage market will be much greater than past Fed tightenings.