Mortgage Markets in Transition

The FOMC’s reasoning was spelled out in the meeting announcement:

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The mortgage markets have slowed over the past several months as mortgage interest rates increased. Refinancings have dropped to around 60% of all new mortgages and could drop to around 36% next year. Lending for new purchases will make up only a portion of the decline.

According to its September MarketPulse newsletter, CoreLogic Inc. (NYSE: CLGX) thinks the housing market needs to transition from a lending-rate driven model to a home value-driven model if there is to be a sound mortgage market in the future. Factors that will affect that transition include low long-term estimates for U.S. GDP growth of just 1.75%, higher mortgage rates slowing the pace of new housing construction, the impact of new lending requirements and a reduction in the number of all-cash sales.

CoreLogic notes:

The housing sector has played a pivotal role in driving GDP growth since late 2011, but rising rates will modestly temper the contribution going forward. Nonetheless, rising rated do not pose a burden that is insurmountable.

The housing sector contributed 17% to first-quarter 2013 GDP growth. That cannot contract much if the U.S. economy is going to recover. The Fed knows that, which is a big reason that a tapering of asset purchases has been delayed.