So the Fed stopped buying Mortgage Backed Securities, and people are wondering if this will affect mortgage rates. There's been plenty of whistling past the graveyard, guesswork and denial, where so-called experts have been trying to tell us that there will be minimal - if any - change to rates.
That pipe dream is just nonsense.
Let's look at what we can expect for mortgage rates and the overall Bond market in the months ahead. During the past fifteen months, the Fed purchased $1.25 Trillion in MBS, which represented 80% of the mortgage market. Prior to this program, mortgage rates were above 6%. Now that the Fed program has ended, it's reasonable to assume that mortgage rates will rise back towards those levels.
Just How Much Money is $1.25 Trillion?
In today's financial headlines - the word Trillion is often casually thrown around. So much so, that it's easy to lose perspective on how much money this really represents. Picture a stack of $100 bills. It might surprise you to know that it only takes a stack four inches high to be worth $100,000. So $1,000,000 would be a stack of $100 bills 40 inches tall. How about a Billion? Well, you would have to stack $100 bills up to the top of the Empire State Building...twice...in order to reach a Billion. So to picture $1.25 Trillion represented by a stack of $100 bills - that stack would be 850 miles high. If you could turn that stack on its side and were able to drive alongside it, it would take you longer than 14 hours to reach the end. If you laid those $100 bills down side by side, they would travel around the world 50 times. We're talking about a lot of money here.
The Fed's purchasing influence has been significant. And now in the absence of this safety net, Bond prices and mortgage rates will experience greater volatility and a gradual worsening. Adding to this is the fact that the Fed will, albeit gradually, begin to sell some of their mortgage holdings, as they reverse their quantitative easing measures. It doesn't take a rocket scientist to see that this will pressure Bond prices...but read on, because there are additional factors at play, which will influence Bond prices lower and mortgage rates higher.
The ‘How Much is a Trillion’ topic reminds me of this article:
Exponential Money in a Finite World
Related previous posts:
Arithmetic, Population, & Energy and The Crash Course
Chris Martenson: The Crash Course in 45 Minutes (or less)