Mortgage Market to Remain Stable with New Investors Filling the Fed Void

Investors are wary of the direction that the housing market may take, now that the Fed is no longer supporting it. However, analysts believe that the sector will not be subjected to much turbulence in the form of soaring interest rates because other investors who have been waiting in the wings for sound investment opportunities will fill in the void.

As the Fed calls an end to its $1.25 trillion investment program in mortgage bonds, which helped steer the housing segment out of the recession, institutional investors like pension funds are beginning to look for good mortgage loan acquisitions to add to their portfolio.

The past year witnessed restricted supply owing to the Fed intervention, and investors can now have some more exposure in these markets. Moreover, as the economy begins to get back on its feet, more funds are available for investments. These factors will prompt buying by large institutional investors, which might keep the housing market stable in spite of the Fed withdrawal.

In addition, bad loans buyout by the government will keep a significant amount of usable funds with investors who are expected to plough these back into housing, creating enough demand to sustain the industry. At the same time, this renewed demand will support prices, keeping these investments attractive. As these investors only account for 18% market share now as opposed to the 25% they held before the Fed bailout, there is a clear scope for further investments.

Analysts hope that these events will keep yield spreads tight. Expectations are that risk premiums will go up by a modest 0.2 percentage points, which is a minimal change as compared to the 1.5 percentage point fall at the end of 2008. The combination of limited supply, willing investors, and available cash will ensure stability. If these predictions come true, mortgage rates will continue to stay affordable. This will push up purchasing activity as home buyers become more optimistic ahead of the traditional peak period during spring.

As housing market activity levels out after a period of improvement, market players are hoping for resurgence in the near future owing to these factors. The Fed’s continued support and the home buyer benefit policies unveiled by the government have done their bit to stabilize the market so far. It remains to be seen how the sector will do once it is left to stand on its own for the first time since the recession.

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