Fed just hit the RESET button. What big change is coming in the US?
The US housing market is in a completely unsustainable state. But the Fed and the government are taking decisive action to help. Some of them are truly fundamental. What are they?
There are several new developments. But first, a little context.
"We still have a long way to go. It's going to take some time to get to a level of interest rates that is sufficiently restrictive... We're also going to stay the course until the job is done," Powell told reporters after unveiling the Fed's fourth straight three-quarter-point increase in the federal funds rate.
That's not quite what builders and mortgage brokers wanted to hear.
For one thing, this latest increase shouldn't send mortgage rates up. On the other hand, this next rate hike also means that the financial markets are not going to send mortgage rates down.
Powell admitted during the press conference that continued quantitative tightening means the US housing market is in for more pain.
"Housing is being significantly impacted by these higher rates," Powell told reporters. "The housing market needs to get back into balance between supply and demand. We're well aware of what's going on there."
What exactly does this mean? So how is the Fed addressing this?
The Fed and Powell are not afraid to make drastic and bold statements. Indeed, in June, Powell told reporters that the US housing market needed to be "reset."
"We've seen home prices move up very, very strongly over the last couple of years. So that's now changing... I would say if you're going to buy a home, then you need to kind of put your feet back on the ground. Get back to reality.We need to get back to a situation where supply and demand are coming together again and where inflation is low again and mortgage rates are low again," Powell told reporters this summer.
Powell admitted at the time that he wasn't sure how the reset would affect home prices. However, fast forward to the September meeting, where Powell admitted that the Fed's policy actions had pushed the U.S. housing market into an "ugly correction."
However, it seems to be working quite well - the US housing market is coming to equilibrium in the face of a jump in rates. Unlike the stock market, the correction in the housing market is manifested most visibly by a sharp decline in home sales. Understandably, this correction is also expected to put downward pressure on house prices.
Credit score
Many believe that changes in the so-called credit score should also bring about an improvement in the housing market .
Acredit score - or credit score is a number that provides a comparative estimate of an individual's creditworthiness based on an analysis of their finances. It is an inexpensive and the most important form of analysis of an applicant for approving credit applications.
Lenders, such as banks and credit card companies, use credit scores to evaluate the risk of lending money to consumers. Lenders say the mass use of credit scores has made credit more widely available and cheaper for many consumers. So it's something that U.S. residents need to watch and address carefully.
https://www.youtube.com/watch?v=-S91Pe-BjL8
But now there is news afoot that could affect the housing market as well. In fact, the main and most used model for creating credit scores is the one from FICO. And now it's coming with changes.
It's not so much that FICO scores are somehow inappropriate, but that FICO regularly releases new versions of its credit score models to reflect improved analytical tools and new data. Anything from new technological advances to changes in consumer behavior can trigger score updates from FICO and other credit score companies.
So which changes could affect the housing market?
- The first is the use of "alternative data" to calculate credit scores.
Under this new program, banks would be able to take into account different aspects of a person's financial history than they do now. For example, average account balances over time and whether they have ever overdrawn their credit. In terms of impact - VantageScore estimates that this would allow an additional 72,000 households to access credit each year - opening the door to access to finance for many more people. - Second, the government's housing agencies - Fannie Mae and Freddie Mac - have approved FICO 10T scores and Vantage Scores to be used for housing finance.
"Both FICO 10T VantageScores will examine a broader range of payment history data, from cell phone bills to utility and rent payments, in determining borrowers' creditworthiness" - so they will be more inclusive. - These changes "will reduce costs and further encourage innovation, while not compromising the accuracy and predictability of a borrower's ability to repay" will simply be better and more accurate, allowing better analysis of potential loan applicants and therefore property purchases.
Or to put it another way, these new credit scoring models are predictive, meaning that their goal is to accurately determine how likely you are to repay the loan. And they will predict according to their own studies - for example, if you paid your rent on time, paid your utilities on time, and paid your phone bill on time, you are likely to pay your mortgage on time - even if you don't have a traditional credit score. Which means that it opens the door to a huge number of people who have not had that option in the U.S. until now. Just because of the old method of making a skorne.
What do you think? Could these moves significantly impact the US housing market?
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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and a few other analyses. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.
