Our co-heads of Securitized Products Research Jay Bacow and James
Egan discuss the impact of upcoming regulatory changes on U.S.
mortgage rates and home sales.
Read more insights from Morgan Stanley.
----- Transcript -----
Jay Bacow: It is March and there's some
madness going on. I'm Jay Bacow, here with Jim Egan, noted Wahoo
Wa fan.
James Egan: Hey, it looks like Virginia's
going to be back in the tournament this year, hoping for a three
seed, looking like a four seed. It's the first year that my son
is really excited about it. So, hoping we can win a few
games.
Jay Bacow: Let's hope they don't lose the
first game and make him cry like you did a few years ago. But
…
Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of
Securitized Products Research at Morgan Stanley.
James Egan: And I'm Jim Egan, the other
co-head of Securitized Products Research at Morgan Stanley.
Jay Bacow: Today, with everything going on
in the world, we thought it'd be prudent to discuss the U.S.
mortgage and housing market.
It's Thursday, March 12th at 10:30am in New York.
James Egan: Jay, as you mentioned, there is
a lot going on in markets right now, but hey, people need to live
somewhere. And those somewheres remain pretty unaffordable. But
this administration has been very focused on affordability, and
we also have some updates on what is clearly the most exciting
part of the housing and mortgage markets – regulation. What's
going on there?
Jay Bacow: Look, nothing gets me more
excited than thinking about the regulatory outlook for the
mortgage market. We've been focusing a lot on what's happening in
D.C. with possible changes that could be helping out
affordability, changes to the investor program, changes to the
policy rate.
But Michelle Bowman, who is the Vice Chair of Supervision, has
been recently on the tape saying that we could get an update and
a proposal for the Basel Endgame by the end of this month; and
that proposal for the Basel Endgame is likely to make it easier
for banks to hold loans on their balance sheet.
It's going to give banks excess capital and the combination of
these, along with some other changes that are going to be coming
from the Fed, the FDIC and the OCC around: For instance, the GSIB
surcharge that our banking analysts led by Manan Gosalia have
spoken about – it's really going to help out the mortgage market
in our view.
James Egan: Alright, so freeing up capital,
helping the mortgage market. When we think about the implications
to affordability specifically, what do you think it means for
mortgage rates?
Jay Bacow: Right. So, it's important that
[when] we think about the mortgage rate, we realize where it's
coming from. The mortgage rate starts off with the level of
Treasury rates, and then you add upon that a spread. And the
spread is dependent among a number of different factors. But one
of the biggest ones is just the demand. And one of the reasons
why mortgage rates have been so high over the previous four years
was (a) Treasury rates were high, but also the spread was
wide.
And we think one of the biggest reasons why the spread was wide
is that the domestic banks, who are the largest asset type
investor in mortgages – they own $3 trillion of mortgages –
basically weren't buying them over the past four years. And one
of the reasons they weren't buying was they didn't have the
regulatory clarity.
And so, if the banks come back, that will cause that spread to
tighten, which will likely cause the mortgage rate to come down.
That is presumably, Jim, good about affordability, right?
James Egan: Yes. And I want to clarify, or
at least emphasize, that affordability itself has been improving.
Over the course of the past four to five months at this point,
we've been close to, if not at the lowest mortgage rate we've
seen in three years. And when we think about what that has
practically done to the monthly principal and interest payment on
homes purchased today.
Like that monthly payment on the median priced home is down $150
over the past year. That's about a 7 percent decrease. When we
lay in incomes – or when we layer in incomes to get into that
actual affordability equation, we're at our most affordable place
since the second quarter of 2022.
So yes, big picture, this is still a challenge to affordability
environment. But it's not as challenged as it's been over the
past three years.
Jay Bacow: All right, so affordability
improving. It's still challenged though. What does that mean for
home prices then?
James Egan: So, when we think about the
home price implication of mortgage rates coming down; of mortgage
rates coming down in an environment where incomes are going up –
we're thinking about demand for shelter, purchase volumes and
supply of that shelter. And demand really has not reacted to the
improved affordability environment.
That's not unusual. Normally takes about 12 months for
affordability improvement to pull through in terms of increased
transaction volumes. But we do think that the lock-in effect that
we've talked about in detail on this podcast in the past, that is
going to play a role here.
Mortgage rates end of February finally hit a five handle, really,
for the first time in three years. They're back above that now
with the volatility in the interest rate markets. But from 4
percent to 6 percent, mortgage rates is effectively an air
pocket. We don't think you're going to get a lot of unlocking at
these levels.
So we think that transaction volumes will pick up. We're calling
for 3 to 4 percent growth in purchase volumes this year. But
they've been largely flat for two to three years at this point.
And more importantly, any improvement in affordability that comes
from a decrease in mortgage rates is going to lead to
commensurately more supply alongside that growth in demand –
which is going to keep home prices, specifically, very range
bound here.
The pace of growth is slowed to about 1.3 to 1.5 percent right
now. We've been here for four or five months. We think we're
pretty much going to stay here. We we're calling for 2 percent
growth, so a little bit acceleration. But we think you're in a
very range bound home price market.
Jay Bacow: All right, so home prices range
bound, affordability improved. But still has a little bit of room
to go. Some possible tailwinds from the deregulatory path that
will make homes being a little bit more affordable. Fair amount
going on.
Jim, always a pleasure speaking to you
James Egan: And always great speaking to
you too, Jay. And to all of our regular listeners, thank you for
adding us to your playlist. Let us know what you think wherever
you get this podcast. And share Thoughts on the Market with a
friend or colleague today.
Jay Bacow: Go smash that subscribe button!
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.