The fiscal lunacy in Washington and the Federal Reserve’s balance sheet unwind are creating waves for the housing market. 2018 was starting off on the right foot with a noticeable, yet moderate rise in bond yields. As we received more concrete evidence that the Federal Reserve was actually unwinding some of that gigantic balance sheet, volatility erupted pretty quickly.

After a 12oo point plunge in the Dow, some savvy mortgage borrowers probably took advantage of the temporary fear in the market to score a decent mortgage rate. It was a small window of opportunity, because less than 24 hours later the Plunge Protection Team was doing its thing to stave off a continued decline in stocks and the markets stabilized. Manipulation of asset markets has been the order of the day for years now. With the markets apparently stabilized, bond yields are creeping higher again with the 10-year yield touching 2.878% today.

Right on cue, Mr. Market has responded to the subsequent rise in yields by puking all over itself again with the Dow dropping over 1000 points for the second time in a week. This newfound increase in volatility begs an important question. Why exactly was volatility virtually absent for the last several years? Could it be that the the world’s largest hedge fund was providing an artificial picture of the true economy? Surely not. Surely the Fed’s massive portfolio of mortgage-backed securities and Treasuries wasn’t glossing over structural problems like rising consumer debt.

As the U.S. housing market moves into toward the spring selling season, I suspect there are going to be some buyers and sellers who end up dazed and confused by the resurgence of volatility. This is the inevitable result of the market tinkering and can-kicking that has been going on for the better part of the last decade.

U.S. consumers (and many homeowners) are now out on a limb. The prospect of higher interest rates is probably the last thing they needed when many are already treading water. Regardless, that may not stop the Fed from it’s advertised intent to raise interest rates three more times this year and continue with their balance sheet unwind.

The trolls in Washington and their enablers in the Eccles building are increasingly devoid of credibility so be careful where you get your advice from. As we learned from the U.S. Forest Service, fire suppression and intervention can lead to even bigger catastrophes down the road. Interfering with the natural order of things has consequences. They may be hiding in plain sight.

The SOMA report for February 7 showed no change in the Fed’s balance sheet during the past week. It will be interesting to see if the Fed continues to follow through with their normalization schedule as planned. If they do, the “small potatoes” decline in the stock markets during the past week could turn into serious disruption.