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Housing: How Fed Policy Is Aiding the Real Economy
Amid a world of economic headwinds, the US housing market has been a bright spot—delivering a V-shaped recovery since April’s plunge and possibly offering some insight into the efficacy of the Fed’s activities year to date, as well as broader consumer health. New homes sales reached an adjusted annual rate of 901,000 through July—the highest mark since December 2006 and 13.9% above the adjusted annual rate in June. The MBA Purchase Index reached a 12-year high in June. Vacation spots like Tahoe, CA and Vail, CO have also experienced surges—seemingly thanks to city dwellers, many of whom are now less geographically tied to offices.
Low interest rates have likely contributed to heightened demand—or at least they’ve enabled it. In recent months, the Fed’s accommodative efforts have contributed to some record-low mortgage rates. Fed head Jerome Powell recently announced the central bank would allow inflation to drift above its 2% target—likely extending the lower-for-longer interest rate environment and, in theory, the extant mortgage surge.
The Fed has also helped reduce mortgage rates through its purchasing of mortgage-backed securities (MBS). At the crisis’ outset, the FOMC committed to purchase a minimum of $200 billion in MBS, focusing on the 30-year and 15-year fixed rates (a goal which they’ve already exceeded, having bought some $1tn of MBS year to date). And indeed, data show the Fed’s March intervention helped bring down bid-ask spreads in the MBS market, lending some stability to the mortgage market.
Existing homeowners are also taking advantage of lower mortgage rates. While mortgage refinancing rates have been generally higher than those for home purchases—one likely reason, along with tighter lending standards, the MBA Refinancing Index has retreated from its peak earlier this year—demand at the end of August was still at a level not seen since 2013.
Rising home sales and home improvement projects funded by mortgage refinancing—via cash-outs, lower payments or both—are having a positive impact on the economy. The rebound in hiring for residential construction and residential contractors has been stronger than the overall labor market. Home improvement retailers Home Depot and Lowe’s reported strong Q2 results and noted the strength had carried into August. Home Depot in particular cited improved demand from professionals, indicating the strength goes beyond home DIY projects. And Whirlpool said it has seen increased demand for its appliances, including from homebuilders.
This is all good news, but is it sustainable? Refinancings and pandemic relocations can only carry the housing market so far. There are some indications millennials (and Gen Z) might finally start contributing to new household formation, which has been structurally weak since at least the great financial crisis. Recent analysis suggests millennials have contributed to home purchases during the downturn, with first-time homebuyers accounting for 34% of July sales. A structural tailwind behind the strong policy support could keep the housing market on solid footing in the post-pandemic recovery.
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