How China could crush the U.S. housing market
- Mortgage rates are on the rise, fueled by investors selling U.S.
- Guy Cecala, executive chair of inside Mortgage Finance, noted the potential threat.
- As of January, foreign countries held $1.32 trillion in U.S.MBS, representing 15% of the total outstanding, according to Ginnie Mae.
Mortgage Rates Could Rise Amid China Treasury, MBS Moves
Mortgage rates are on the rise, fueled by investors selling U.S. Treasury bonds. Some analysts suggest this activity could be a response to new tariff plans. However, a possibly larger issue looms: the possibility of China, a major holder of agency mortgage-backed securities (MBS), selling off its holdings. other nations might follow suit, further destabilizing the market and impacting the spring housing market.
Guy Cecala, executive chair of inside Mortgage Finance, noted the potential threat. “If China wanted to hit us hard,they could unload Treasuries,” Cecala said. “Targeting housing and mortgage rates is a powerful driver.”
As of January, foreign countries held $1.32 trillion in U.S.MBS, representing 15% of the total outstanding, according to Ginnie Mae. Japan, China, taiwan, and Canada are the largest holders.
China began reducing its U.S. MBS holdings last year. By the end of September, its holdings were down 8.7% year over year, and by December, they had fallen 20%. Japan’s MBS holdings also decreased at the start of December after showing gains in September. Accelerated sales by these nations, along with similar actions from others, could push mortgage rates even higher.
Eric Hagen, mortgage and specialty finance analyst at BTIG, said the market is concerned about potential retaliatory actions. “Most investors are concerned that mortgage spreads would widen in response to either China, japan or Canada coming in with a retaliatory objective,” Hagen stated.
wider spreads translate to higher mortgage rates. The spring housing market is already struggling due to high home prices and declining consumer confidence. Recent stock market volatility has heightened concerns among potential buyers about their savings and job security. A Redfin survey revealed that 20% of potential buyers liquidate stock to fund their down payments.
Hagen believes that foreign entities selling MBS could further unsettle the mortgage market. “The lack of visibility for how much they could sell and their appetite for selling… would scare investors,” he explained.
Adding to the pressure, the Federal Reserve is allowing MBS to roll off its balance sheet as part of its efforts to reduce its overall holdings. This contrasts with actions taken during past financial crises, such as the pandemic, when the Fed purchased MBS to keep rates low.
“That is a source of potential pressure on top of this whole conversation,” Hagen added.
What’s next
The housing market faces uncertainty as international economic tensions and domestic monetary policy converge.Monitoring foreign holdings of U.S. debt and the Fed’s actions will be crucial in assessing the future direction of mortgage rates and the overall health of the housing sector.