| | | | | | | Presented By Crexi | | | | Axios Markets | | By Matt Phillips and Emily Peck · May 18, 2022 | | 🍳 Good morning, Market-istos. Matt here. Today we take a tour of the $2.7-trillion financial wonderland that is the Fed's mortgage-bond holdings. Also, still-high inflation is most hurting the mood among those in the suburbs and exurbs. I, for one, am in a fine mood. Though I might be the only one. Today's edition, edited by Kate Marino, is 1,190 words, 4.5 minutes. | | | | | | 1 big thing: The Fed's $2.7 trillion mortgage problem |  Data: Federal Reserve; Chart: Axios Visuals If you took out a mortgage over the last couple of years, there's a good chance the holder of that loan is America's central bank — a consequence of its monetary stimulus efforts throughout the pandemic, Axios' Neil Irwin writes. Why it matters: The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities. - The problem: Extracting itself from this market risks crashing the housing industry, and creating intense political blowback for incurring financial losses.
By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases known as "quantitative easing," swelling that number to $2.7 trillion. - The policy contributed to ultra-low mortgage rates that stimulated home buying and refinancing activity until recently.
State of play: Now, as the Fed seeks to tighten monetary policy to combat inflation, it wants to shrink that portfolio. It may turn out to be easier said than done. - The Fed says that by September it will reduce the mortgage portfolio by up to $35 billion per month. Emphasis on "up to."
In fact, the numbers will probably undershoot that. - For now, the Fed is just looking to let its holdings shrink as securities get paid off. But with mortgage rates way up in recent months, people have little incentive to sell their homes or refinance a mortgage — so these mortgages are likely to stay on the Fed's books longer.
That will leave the Fed with unappealing options. It could simply accept that it will continue to have an outsized role in the housing market and a bigger balance sheet than it might prefer. - Or it could begin selling the securities on the open market.
Yes, but: That will create its own problems. If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury. - In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.
- Plus, the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates. Homebuilders, real estate agents, and other influential industry groups will make their unhappiness known to elected officials.
The bottom line: The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. Go deeper. |     | | | | | | 2. Catch up quick | | 🇷🇺 U.S. likely to block Russian bond payments to U.S. creditors, raising default prospects. (Bloomberg) ⬆️ U.K. inflation surges to 9%, a 40-year high. (Reuters) 📉 Target stock sinks on earnings miss, cost warning. (CNBC) | | | | | | | | 3. Homebuilder reality check |  Data: FactSet; Chart: Axios Visuals The once-giddy mood among homebuilders, a side effect of the COVID-era housing boom, is ebbing in as mortgage rates surge, Matt writes. Driving the news: The National Association of Home Builders' measure of confidence among builders of single-family homes fell for the fifth-straight month, near a two-year low. - Separate gauges measuring sales expectations over the next six months and traffic of potential buyers also fell sharply.
Why it matters: The drop reflects how the Fed's push to lift rates is quickly changing the economic terrain for companies and consumers alike. - Mortgage rates — heavily influenced by expectations for what the Fed will do with interest rates — have soared to more than 5.25%, from roughly 3%, for a 30-year fixed-rate loan.
- The rise — along with a roughly 20% rise in home prices over the last year — has drastically reduced affordability.
What they're saying: "The surge in rates is clearly choking off the flow of would-be new buyers," wrote Ian Shepherdson, chief economist at Pantheon Economics. The bottom line: The Fed is trying to slow the breakneck pace of rising house prices, and homebuilders are clearly getting a bit jittery about a potential slowdown – but their mood, at least by recent standards, remains quite elevated. | | | | | | | | A message from Crexi | | Better understand your CRE market | | |  | | | | Every CRE market is unique. Intelligence provides the data and analytics real estate professionals need to understand markets quickly and with confidence. The benefits: Access over 13 million sales comps, insights, map overlays, search tools and much more. Explore Intelligence. | | | | | | 4. Businesses warned about Roe unrest |  | | | Illustration: Sarah Grillo/Axios | | | | Law enforcement organizations are warning corporate leaders about the risk of civil unrest, and perhaps violence, if the Supreme Court ultimately overturns Roe v. Wade, Emily writes. Why it matters: As the American political sphere becomes more fractured, it's often the business sector that's forced to figure out how to maneuver around policy shocks or social unrest — and the looming Supreme Court decision on abortion is expected to have massive ripple effects everywhere, including at work. State of play: A memo from the Department of Homeland Security, obtained by Axios, warns about violent threats from extremists — on both sides of the issue — who might target protestors, government officials, companies that make or sell medication to end pregnancies and "organizations that fund and facilitate travel for those seeking abortions." - Law enforcement is reaching out to corporate leadership, flagging the potential for civil unrest, said Jonathan Wackrow, a risk management consultant at Teneo, who works with Fortune 100 firms.
- It's really an "unprecedented move," added Wackrow, a former special agent with the U.S. Secret Service, meant to help give corporate security teams time to prepare.
Context: Several companies in recent months, including Citi, Starbucks and Match.com, put policies in place that would pay for employees who need to travel to access reproductive care. Keep reading. | | | | |  | | | | If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. | | | | | | | | 5. Inflation has squelched the optimists |  | | | Illustration: Annelise Capossela/Axios | | | | The broad optimism that Americans felt about the economy in the spring of 2021 — optimism that even a global pandemic and hundreds of thousands of COVID deaths couldn't squelch — has finally been undone by inflation, and health worries that are getting worse rather than better, Axios' Felix Salmon writes. Why it matters: The sharp rise in food and energy prices over the past year has had a particularly harsh effect on the finances of suburban and rural Americans. Driving the news: Every six months, McKinsey and Ipsos conduct a massive survey of Americans, asking about their perceptions of the current state of the economy. This time around, sentiment has fallen sharply. By the numbers: For the first time since the survey began last year, Americans have a negative outlook on the economy. The overall index fell to 99 (a "negative outlook") this spring from 103 (a "positive outlook") a year ago. - City-dwelling Americans remained optimistic overall, with their score falling modestly from 112 to 109.
- The score for suburbanites fell from 103 last fall to 96 this spring. And rural Americans fell to a shocking 85, down from an already weak 95 a year ago.
Between the lines: Overall inflation is bad, with prices rising 8.3% over the past year. Food and energy prices, however, have shot up much more quickly than that, up 17.4% in April from a year previously. Gasoline prices alone were up 43.6%. - Inflation, therefore, hits hardest where Americans have large families with more mouths to feed, and in places where everything is a drive away and there is no public transit.
Keep reading. | | | | | | | | A message from Crexi | | Inform better CRE decisions | | |  | | | | Crexi's CRE data hub, Intelligence, offers real estate professionals access to over 13 million sales comps and key market data. Why it's important: In an ever-changing CRE environment, it's essential to have as much market data as possible. Learn more about Intelligence. | | |  | It's called Smart Brevity®. Over 200 orgs use it — in a tool called Axios HQ — to drive productivity with clearer workplace communications. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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