Experts Are Scrutinizing the Fed Amid Skyrocketing Home Prices

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Home prices have skyrocketed amid the global pandemic and many experts think the Fed is ignoring the crisis.

As of January, home prices increased 11.2 percent year-over-year, according to the latest S&P CoreLogic Case-Shiller Index. That is the largest annual gain in nearly 15 years.

“In more than 30 years of S&P CoreLogic Case-Shiller data, January’s year-over-year change is comfortably in the top decile. That strength is reflected across all 20 cities,” said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices. “January’s price gains in every city are above that city’s median level, and rank in the top quartile of all reports in 18 cities.”

Home prices have skyrocketed mainly because of a low supply and strong demand, but mortgage rates determined by the Federal Reserve are also playing a key role. Rates are sitting near historic lows as they follow the yield on the 10-year Treasury. However, many individuals do not know that mortgage rates are also influenced by purchases and yields of agency-backed mortgage securities.

The Federal Reserve ramped up its purchase of mortgage-backed securities when it jumped into action in March of 2020. The Fed now owns around a third of the mortgage-backed securities market. The Fed purchasing mortgage-backed securities provide liquidity to the mortgage market.

At the start of 2019, the Fed had a $1.6 trillion position in mortgage-backed securities. As of last week, the Fed had a $2.2 trillion position in mortgage-backed securities. “They’ve continued on autopilot. I don’t think there’s been any discussion within the Fed. The Fed is just afraid to change because they don’t want it to be seen as a form of taking their foot off the pedal,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

“Again, why is the Fed still buying MBS? As home price changes are not included in either CPI or PCE, the question is when and how this filters into imputed rent, but inflation is real for those looking to buy a home,” he added. “The Fed again is responsible for pricing out first-time buyers.”

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