The US Federal Reserve's mortgage bond holdings have become a central component of its monetary policy, as highlighted in a recent paper presented at the Kansas City Fed's Jackson Hole conference on August 25, 2024 [9c880a4c]. Since the spring of 2020, the Fed's bond purchases have significantly increased its holdings to around $9 trillion by summer 2022, with mortgage bond holdings rising from $1.4 trillion in March 2022 to $2.7 trillion [9c880a4c]. The paper indicates that both banks and the Fed reduced mortgage spreads by approximately 40 basis points during 2020 and 2021, resulting in a $3 trillion increase in mortgage originations [9c880a4c]. Currently, the Fed's total holdings have decreased to $7.3 trillion, with mortgage holdings at $2.3 trillion [9c880a4c]. The process of quantitative tightening (QT) has been slower than anticipated, largely due to prevailing housing market conditions [9c880a4c]. Recent research suggests that the Fed may hold around $600 billion in mortgage bonds by 2035 if current trends continue [8763b36f].
In light of these developments, the Federal Reserve is imposing additional restrictions on mortgage activity to prevent a repeat of the 2008 financial crisis [27d8f2a7]. These new rules, set to take effect in September, aim to address concerns about risky lending practices and the potential for another housing bubble [27d8f2a7]. The restrictions include limits on debt-to-income ratios for borrowers, stricter underwriting standards, and increased scrutiny of mortgage lenders [27d8f2a7]. Critics argue that these regulations could make it more difficult for some borrowers to qualify for mortgages, potentially slowing down the housing market [27d8f2a7].
The US housing market is currently facing significant challenges, including a decline in existing home sales, rising mortgage rates, and limited inventory [9b749437]. This has led to reduced construction by homebuilders and a drop in apartment construction [3c43732a]. The subdued residential construction is expected to limit economic growth, although not enough to trigger a recession [3c43732a]. Homebuilders are cutting back on production plans, and confidence among builders is declining [3c43732a]. Multi-family housing starts have also seen a drop-off, signaling a potential drag on economic growth [3c43732a]. Despite these challenges, the US economy is expected to show strong growth in the third quarter, with retail sales exceeding expectations and consumers planning to spend more this season [9b749437]. However, concerns remain about the strength of the labor market and consumers in the face of high borrowing costs [3c43732a].
Plunging US home sales are impacting consumer spending, as fewer Americans are moving into houses and buying furniture and appliances [fee0dba6]. Spending on furniture and related items fell nearly 12% in October compared to the previous year [fee0dba6]. Home goods sellers, including Z Gallerie and Serta Simmons Bedding, have filed for bankruptcy due to weaker demand [fee0dba6]. The Federal Reserve's rate hiking campaign to tame inflation has contributed to the slowdown in the housing market [fee0dba6]. Mortgage rates reached their highest level since 2000 in October, making housing less affordable [fee0dba6]. A gauge of pending sales for existing homes reached its lowest level since 2001 [fee0dba6]. The average household spends $8,000 more on home-related goods and improvements in the two years after a home purchase [fee0dba6]. Retailers such as Williams-Sonoma and Ethan Allen Interiors are experiencing declines in revenue [fee0dba6]. The home-goods furniture industry may continue to see a pause in consumer spending and an increase in bankruptcy filings until new home purchases pick up or mortgage rates decrease [fee0dba6].
The current housing crisis in the US has prompted calls for assistance from developers. David O'Sullivan discusses the challenges facing the housing market and the need for support from the state and federal governments [fdf14b09]. The article highlights the conflict between the Federal Reserve's desire to keep interest rates steady to fight inflation and the impact of high interest rates on housing costs for homeowners and real estate investors [fdf14b09]. Homebuyers who purchased homes in the last year have expressed regrets, citing affordability issues and compromises [fdf14b09]. The article emphasizes the need for interest rates to drop to improve the real estate market and address the housing crisis [fdf14b09].
Lawmakers have been looking for solutions to high home costs in areas other than construction, blaming short-term rentals, algorithms, and Wall Street [19945545]. However, the key to lowering housing costs is to build more housing [19945545]. The United States has experienced a growing gap between new households seeking housing and the number of homes built, resulting in a shortage of 6.5 million homes [19945545]. Short-term rental restrictions have been shown to have minimal effect on home prices and can even have a positive effect on local tourist economies [19945545]. To lower housing prices, regulators should make it easier to build by removing red tape like single-family zoning, setback and height restrictions, and parking minimums [19945545]. Increasing the housing supply is the genuine solution to the housing crisis [19945545].