It could take six more years for the Federal Reserve to shrink its mortgage bondholdings to less than $1 trillion, according to a new Goldman Sachs estimate. The Fed’s balance sheet already has fallen to about $8 trillion from a near $9 trillion peak last year. But progress has been slow in shedding its $2.5 trillion in mortgage-bond holdings, an enduring vestige of its pandemic-era policies.
A big reason for that has been climbing U.S. mortgage rates, now north of 7%, with the Fed’s rate hikes putting refinancing and sales activity largely on ice. The Fed last week suggested its policy rate could stay above 5% for longer than an earlier forecast, darkening the housing-market outlook and fueling worries that mortgage rates could reach 8%, instead of providing the relief many on Wall Street had been anticipating. “Although many are locked into fixed rate mortgages, conditions for new buyers are strained,” Emin Hajiyev, senior economist at Insight Investment, wrote in emailed commentary. As 30-year mortgage rates skyrocketed from a 2.7% pandemic low, home affordability sank to its lowest level since at least 1989, according to Hajiyev’s estimates. “For the first time since 2006, the median income does not qualify for the median property for sale.” See: Interest rates will stay high ‘well into next year,’ Fed’s Goolsbee says Goldman breaks down how the Fed’s footprint grew in the roughly $12 trillion agency mortgage-bond market since 2018, including its big uptick in purchases during the COVID crisis.
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