As rates fall and affordability improves, we expect these psychological and structural dynamics to help drive demand.
Home Prices at National Level to Stay Steady
We expect home prices at a national level (as per national home-price index data) to stay flat to slightly positive this year. At a regional level, the picture is more varied. In parts of the South and West, median sale prices have fallen as boom conditions—fueled by a surge of state-to-state migrants during COVID—begin to abate. Homebuilders rushed to meet demand, resulting in high housing supply in these areas. Conversely, in the Northeast, supply is light, and sale prices have been rising.
We think these trends will even out as homebuilders respond to regional dynamics. In our view, well-seasoned assets supported by years of home-price gains should provide a degree of security against regional price strains.
Implications for Investors
With respect to credit risk–transfer (CRT) securities, we expect below-average issuance, solid fundamentals and years of home-price appreciation—which has allowed seasoned mortgages’ loan-to-value ratios to decrease—to remain supportive. Today’s higher prices have significantly increased homeowners’ equity, which provides an incentive for them to stay current on their mortgages.
Even if we see higher unemployment and a weaker consumer, mortgage borrowers are more likely to sell their homes at higher-than-purchased prices and use the proceeds to pay off the debt rather than to default on their mortgage. Tight underwriting standards have also limited borrowers to a very high-quality pool, with average credit scores at origination meaningfully higher than before the Global Financial Crisis.
We also find agency mortgage-backed securities (MBS) compelling. We expect the sector to continue to perform well as growth slows and interest-rate volatility continues to stabilize, now that Fed policy has crystallized. In addition, moderating supply should help offset the effect of lighter demand from banks and overseas investors. That said, we think bank demand could pick up now that the Fed is easing, and if capital regulations are loosened.
Overall, prepayments will remain contained, in our view, given most borrowers have locked in lower rates than are currently available. Thus, while refinancing of the higher-rate mortgages of the past few years should persist, refinancing of lower-rate mortgages—which represent the lion’s share of MBS outstanding—will likely be muted. Regardless, we don’t expect mortgage rates to fall much from here, as they’re more correlated with the 10-year Treasury yield than with Fed policy.
We are closely watching the possible privatization of government-sponsored enterprises Fannie Mae and Freddie Mac. The effect on the agency MBS market will depend, in our view, on the details. Ensuring a continued government guarantee is an important step to maintaining stability.
Overall, we see recent trends in the US housing market as part of a nuanced pattern of normalization from historically favorable conditions. To the extent that they serve as a warning light for possible risks, we continue to assess those risks as mild.
