By Ramsey Su
Mortgage Debt Purchases on Steroids
In calendar year 2013, the Fed purchased $788.25 billion in agency MBS (mortgage back securities).
In calendar year 2013, according to the Mortgage Bankers Association, total mortgage originations were $1,755 billion. $652 billion (37.2%) were for purchases while $1,103 billion (62.8%) were refinances. I do not have the data for the percentage of non-agency loans and am using a rough estimate of 10% for the purpose of this post. In other words, total agency originations should amount to $1,579.5 billion.
The Fed purchased 134% of all agency PURCHASE loan originations in 2013.
In the first half of 2014, ending July 2, the Fed purchased $260.4 billion in agency MBS.
In the first half of 2014, also according to the Mortgage Bankers Association, total mortgage originations amounted to $493 billion. $273 billion (55.3%) were for purchases, while $220 billion (44.6%) were refinances. I am again using a rough estimate of 10% for non-agency loans. In other words, total agency originations should total $245.7 billion (by the way, you may have noticed, mortgage originations are dropping from over $1.7 trillion in 2013 to a pace of less than $1 trillion annualized in 2014).
The Fed purchased 106% of all agency PURCHASE loan originations in 2014 so far.
The Fed had no choice but to taper. Had it continued with 'QE' at the same pace as in 2013, it would have purchased all purchase and refinance originations. What kind of monetary policy is that?
The End of the Rope
I am going to offer one simple chart from Mortgage News Daily below:
Paul Volcker stood tall in the early 1980s, but there has been a never ending wave of accommodations since. QE3 is just a fancy label for the current round.
Now, here is a simple exercise that we all should do individually to help us with real estate related decisions:
- Extend the above chart for the next 5 years. What do you think it is going to look like?
- Give this some thought. Do you think real estate prices should be inversely proportional to the decline in mortgage rates?
- Use your own real estate purchase as an example. Mark the date of purchase and plot its price movements over the above chart. If you think falling mortgage rates should stimulate prices, is that true in your case?
In conclusion, does Fed policy really have anything to do with the real estate market? I believe Fed policies have been misguided for far too long, artificially propping up prices that should be much lower.
Whether you agree or disagree, does it appear that the Feds are finally at the end of the rope?