us home prices roared almost 20 higher in the past year giving families who own properties a major boost to their finances during the pandemic but wall street a key source of mortgage finance sees important questions that lie ahead for the redhot housing market now that the federal reserve has shifted its focus to tightening financial conditions to tackle inflation which is near a 40year high “house price appreciation was a significant contributor to growing household net worth and will likely slow due to higher interest rates and declining affordability” brad tank and neuberger berman’s fixedincome investment strategy team wrote in their firstquarter outlook “additionally federal forbearance programs for mortgages have not been renewed and households benefitting from relief will be required to resume payment” the fed’s december policy pivot includes a plan to raise benchmark interest rates at a quicker pace than expected only weeks before but also a faster end to its emergency bondbuying program now likely by march that leaves the market with “two main questions” according to the neuberger team namely how much mortgage bond supply others will need to absorb as the fed shrinks its near 88 trillion balance sheet also what happens to home price appreciation and refinancing activity if interest rates rise as much as expected read housing is in the grip of an inflation storm and it’s exacerbated by the covid19 pandemic why housing’s not like 2008 after the 2008 financial crisis the government’s prominence in the us housing market grew in part though its mortgage guarantees but also its amassing of bonds in the 82 trillion agency mortgage market agency mortgage bonds accounted for 66 of all housing debt in december according to the urban institute that made the sector a benchmark for 30year mortgage rates including during the recent refinancing boom as lenders originated more than 1 trillion in home loans a quarter the government’s outsize footprint in the mortgage market has meant sway over mortgage rates and lending standards after the subprime debacle a decade ago but it also directed federal housing relief during the pandemic to prevent a wave of evictions and foreclosures many borrowers reeling from job losses in 2020 stayed in their homes instead of facing late fees collections and worse until the economy could return to a more solid footing now forbearance rates on all home mortgages even those held by banks have sharply declined from their pandemic peak recently pegged at a low 17 in november see chart on the back of higher wages and low unemployment in terms of households that means only about 835000 homeowners in november were in forbearance whereas 4 million before the pandemic according to deutsche bank researchers other major departures from last decade’s crisis include a current housing shortage rather than an oversupply coupled with an new era of institutional landlords in the singlefamily rental market that’s meant deeppocketed privateequity owners zillow z and other firms with wall street financing have been competing with families looking to own mortgage experts say the dynamic could help home prices continue to rise at a more normalized rate in 2022 even if 30year mortgage rates rise and properties become harder for families to afford see highpoverty neighborhoods in twin cities see explosion of investorowned homes the minneapolis fed now is keeping track “rising rates don’t cause home prices to go negative but they certainly can slow down the growth in home price appreciation” said scott buchta head of fixedincome strategy at brean capital in a phone call his forecast is for prices to rise 6 to 10 this year depending in part on where 30year mortgage rates shake out what rate is too high as in the wake of the 2008 crisis the fed in the past two years has loaded up its balance sheet with treasurys and agency mortgagebacked securities during the pandemic in a bid to keep liquidity flowing and credit affordable fed chairman jerome powell now hopes to engineer a “soft landing” by raising interest rates and tightening financial conditions to rein in inflation without hurting the job market or sparking a recession many on wall street now expect shortterm rates potentially to increase four times this year from the current 0 to 025 range longerterm rates however likely will hinge on how aggressively the central bank shrinks its mortgage bond holdings buchta said particularly as the fed works to get annual inflation closer to its 2 target from 7 as of december “i don’t think they want to shock markets” he said noting that home price appreciation historically has run about 2 to 3 above inflation or roughly 5 growth yearly “20 is not sustainable” that said every 100 basispoint increase in the 30year mortgage rate translates to about a 13 decline in purchasing power for a homeowner relying on financing according to buchta’s estimates in other words the affordability that’s already a problem for many families priced out of the market could get much worse also see interest rates are rising but the fed’s actions could make it easier to get a mortgage