The Federal Reserve is exploring the possibility of unloading its $1.25 trillion in mortgage back securities (MBS), which it has purchased as part of its quantitative easing program. It acquired $1 trillion of these assets after 2014, making it the largest buyer of MBS. Multiple officials from the bank have discussed beginning to reduce its bond holdings including MBS in order to tighten U.S. monetary policy, which may become necessary in the event of increased inflation.
This sell off would have consequences for the market as mortgage rates could rise. Rates have already begun to climb as the Fed has increased interest rates, reaching 4.32 percent last semester for 30-year mortgages; however, moves to sell MBS have the potential to accelerate this trend. Morgan Stanley estimates that the Fed selling $325 billion of its MBS holdings may be equivalent to two quarter-point interest rate increases. This would be on top of the rate increases expected to come in 2017.
As mortgage rates rise, houses may become less affordable and sales could decrease. According to the National Association of Realtors, December home sales declined more than forecasted despite an otherwise strong 2016. When the Fed does decide to begin tapering, the housing market will certainly be affected.