Do you believe the Fed’s investment policy with Operation Twist will improve California’s housing market?
- No (84%, 37 Votes)
- Yes (16%, 7 Votes)
Total Voters: 44
The Federal Reserve (the Fed) has embarked on a modest investment tactic in an attempt to kick-start the economy, a monetary policy dubbed Operation Twist. The plan is a flashback to the action taken by the Fed in the 1960s when the central bank nudged long-term interest rates down in response to a weak economy and growing national debt.
This time around, the Fed intends to do the same with the anticipation of lowering short- and long-term interest rates to encourage borrowing and spending by homeowners, consumers and businesses.
The Fed has already been trickling investments into long-term Treasury bills (T-bills) over the past couple of years but they propose to be a smidge more risky with Operation Twist. Here are the schematics:
- The Fed will sell $400 billion in short-term T-bills to recover dollars previously invested. This money will be used to buy 6-30-year term T-bills through June 2012 (a shrewd move on the Fed’s part since it saves them from having to expand their balance sheet by printing more dollars – which they may have to eventually do anyway…)
- Short-term rates may increase minimally since there is a high demand for short-term T-bills and the Fed will make sure to keep short-term rates relatively low by implementing other policies.
- Long-term rates will decrease because the Fed will buy the T-bills at higher prices. [For more information on past and present short- and long-term Treasury rates, see the first tuesday Market Chart, Current market rates.]
In addition to buying up long-term T-bills – which will drive down mortgage rates as they are based on the 10-year Treasury with a 1.5% spread – the Fed will also direct more maturing principal from agency bonds and mortgage-backed bonds (MBBs) into the MBB market. The expectation: increased demand for MBBs which in turn will further twist-down mortgage interest rates. [For more information on the pace of changing mortgage rates in the western U.S., see Freddie Mac’s Weekly Primary Mortgage Market Survey (PMMS).]
If all goes according to the two-prong twist-down on both the 10-year T-bill front and the MBB front, the Fed predicts home sales volume will return to normalcy, prices will stabilize, mortgage refinancing will get traction and more disposable income will be available to Americans who take advantage of low interest rates to refinance – this will feed money into the economy and pull us out of this Lesser Depression of joblessness.
first tuesday take: Sounds perfect. Just what the doctor ordered. No kidding! The Fed’s rationale for Operation Twist and its MBB reinvestment plan is grandly sound, but Californians must note: an optimistic forecast for home sales volume and mortgage refinancing in this state is questionable for two reasons.
First of all, California home sales volume is not in the gutter because of interest rates. Interest rates are already low – 4.02% for the 30-year fixed rate mortgage (FRM) in the western U.S. region. They’ve been slipping down for most of 2011 so it is highly unlikely another twist-down will lift sales volume.
Instead, buyer melancholia is a result of high unemployment, low consumer confidence and the inability of agents to spark interest in homeownership which has lost public policy support – you know, all that American Dream stuff. Prospective buyers know it’s a good time to buy but this is the year of debt clearing and pragmatic pessimism – they just don’t feel they are financially able. They’d rather go out for dinner and escape for a moment from their underwater environment rather than sell and buy. [For more information on homebuyer sentiment, see the first tuesday Market Chart, Homebuyers feel ready and willing to buy, but not financially able.]
Second, mortgage refinancing is unlikely to soar as the Fed envisions it will. At least in California it is dubious – though low mortgage interest rates are welcome and appealing for those actually able to act, it will be impossible for the state’s deeply negative equity residential and nonresidential borrowers to qualify for refinancing due to the high loan-to-value ratios (LTVs) following the price plunge on properties after the banker-financed Millennium Boom.
In spite of the difficulties unemployment, public sentiment and negative equity present, the Fed’s efforts are not meaningless. They simply require players in the California economy to get off their bench and join the dance (picture: the Fed is doing the twist, awkwardly and all by itself in the corner of the dance floor).
Thus, with all due respect to Chubby Checker, perhaps a Kumbaya is more appropriate here. Investors must acquire income properties, banks must grant principal reductions for mortgages with LTVs over 125%, California’s government, cities and small businesses must mold budgets to accommodate greater hiring, and of course, brokers and agents must advise and keep an eye out for opportunities to be brought to the attention of their clients (the consumers need awakening from a chronic American mental rigor mortis).
Our present and enduring state of detrimentally persistent high unemployment, rock bottom consumer confidence and 2,500,000 negative equity homeowners – roughly 30% — will keep any mortgage money from dancing about and refinancing and purchase-assist financing will unlikely swing above present levels. Before any enduring movement can ever take place in California, mortgage banks must get a clue to give a nod to the cramdown of principal balances and blow off their existing and shadow real estate-owned (REO) inventories hiding behind delinquencies. California’s attorney general is spot on about these resolutions in her refusal to go along with the Big Bankers’ attempt to avoid their liabilities to California homeowners. [For more information on why California quit the Big Bankers’ plan, see the letter issued by the State of California Office of the Attorney General.]
RE: “Will the Fed’s New Policies Revitalize the Housing Market?” from the Atlantic