The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.The Federal Reserve is buying 40 billion of real estate loans per month. The median price of a home in the US for December of 2012 was $180,000. Figure the banks want a 20 percent down payment. That comes out to 36K with a loan amount due of 144k. Take the 40 billion dollars and divide that by $144,000. That figures out to 277,778 home mortgages purchased per month. Just to kick this dead horse one more time multiply that amount by 12 months. The grand total is 3.3 million homes. The total number of homes sold in 2012 was 4.96 million. It kind of looks like the Federal Reserve holds a hell of a lot of home loans; almost 3/4ths of everything written last year. Of course, I must admit that I thought there was something seriously wrong with my pocket calculator when I first ran the numbers.
The biggest problem for a bank, is loaning money long term at low interest rates. Depositors don’t put their saving in a bank for 30 years; they move it around to get a better rate. Banks have no desire to finance 30 year home loans at these rates, when they can service your Visa card loan at 18 percent. They'll write the loans and sell them to the secondary market, and guess who's buying them? The Federal Reserve, in theory, can finance the loans and wait out the full 30 years for repayment and not lose a dime on the deal.
There comes a point where the Federal Reserve has to choose between becoming the financial institution of choice for our real estate market, or get out of it. If and when they exit, interest rates should jump a couple of percent. The neat thing at this transition, a larger portion of the people holding real estate will have “skin in the game.” Most of the liar loans will be off of the books.
What will happen to the real estate market when the Federal Reserve stops buying home loans? Who will step in to provide financing? This implies a future rise in interest rates. A significant rate increase could trash the bond market. And of course the interest paid by us on the national debt would go up accordingly.
Ben’s not traveling to Jackson Hole this year for the meeting of the world’s financial wizards; he has a “previous engagement” which I find hard to believe. Tim Geithner already left at Treasury (very silently) and his replacement has noticeably kept his mouth shut. Bernanke not showing up at Jackson Hole, and Tim leaving, kind of suggests a reshuffling of policy for the world bank which they were the head of, and controlled. Several countries are repatriating their gold from our shores. Nobody has yelled "fire" yet, but this looks like an obvious move towards the exits.
How do we interpret the actions of Tim Geithner and Ben Bernanke? Is there a policy change underfoot that key people disagree with? The only thing that bothers me is the annual 3.3 million home loans the Federal Reserve bought to save our real estate market from ruin. And if you read the papers, real estate sales are picking up --gee, I wonder why? --and for how long?