Happy Holidays! We are just days away from Christmas and 2022! Let’s take a look at what happened this month in the market.
The most significant economic news of December is probably the Federal Reserve’s December FOMC meeting. After the meeting, the Fed announced that they would speed up the tapering of the bond purchases and eventually stop the program in 2022.
What does this mean for the real estate market?
In simple terms, as the Fed buys less bonds and eventually stop increasing its balance sheet, the demand for bonds will be reduced, causing bond prices to fall. The bond that has particular significance to the mortgage interest rates is the “10-year treasury note”. As 10-year bond prices fall, yield will increase. Investors of the 10-year bond also invest in residential mortgages. As bond yields increase, these investors will shift their fund to buy bonds instead of mortgage, causing less supply of funding to mortgage. As the market adjusts, mortgage interest rate will have to go up in order to make it attractive to investors again so they will continue to fund mortgages.
Earlier, we talked about the fear of COVID variants might cause the Fed to keep its loose monetary policy for a longer time. Now, it’s becoming clear that the US government is not going back to the early COVID shutdown measures. The Fed is more concerned about inflation exceeding its target than future unemployment that will be caused by further shutdown.
It’s becoming clear that the real estate market will get softer in 2022 as the increased interest rate will make homes less affordable. This adjustment is long overdue and can be a good way to let some steam out of the overheat real estate market.
