Episode summary
The Warsh Effect on Mortgages
Thoughts on the Market (Morgan Stanley)
· · 6 min · Guests: Jay Bacow, James Egan
Summary
Markets have shifted sharply from expecting Fed cuts to expecting hikes, and the hosts argue that a new chair with a shorter, less explicit communication style could add even more uncertainty. They say less forward guidance from the Fed would likely mean more volatility, which is generally negative for mortgages because investors are already short homeowners’ refinance option. A policy shift from easing to hiking would also make the market less attractive for banks and overseas buyers.
Despite that tactical caution, they do not see the longer-term mortgage backdrop deteriorating. Deregulation is still unfolding, and the hosts say the GSEs are still forecasted to buy $200 billion of mortgages on behalf of President Trump's initiative. But they emphasize that these supports are being offset by weak supply and a mortgage rate environment around 6.5%, which has already slowed housing activity.
On housing, the view is that affordability remains a binding constraint and upside is capped. The host says the market is effectively stuck in neutral, with turnover near 40-year lows and activity holding around the same level for 11 consecutive quarters. Even if rates do not rise much further, the argument is that housing demand will remain trapped in a low-to-mid-6% mortgage-rate world.
Key takeaways
- The hosts say a new Fed chair who offers less forward guidance could increase rate volatility, which is usually bad for mortgage assets.
- They note the market has swung from pricing 2.5 Fed cuts to 1.5 hikes, a roughly 100 basis point reversal in expectations.
- Despite near-term caution, they say deregulation and the GSEs’ expected $200 billion of mortgage purchases remain supportive over time.
- Housing is described as stuck in neutral because affordability is still strained and turnover is near 40-year lows.
- They think a mortgage rate around 6.5% keeps upside capped even if activity has found a floor.
Notable quotes
“Chair Warsh has been pretty clear that he thinks people should do more of what they're good at and less of what they're not good at”
“with less forward guidance from the Fed, the market has more uncertainty. And more uncertainty translates into more volatility”
“Those technicals are very strong in an environment where there really has not been much supply”
“We think this is the the kind of base level for people that need to transact, regardless of where mortgage rates are”
“we just think that that continues to curtail upside. So, it's a housing market and a housing activity space that continues to very much just remain stuck in neutral”
How the episode opens
Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley. — And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. — Today, the glow has maybe worn off the championship of the Knicks, so we can talk about the impact of Warsh on the mortgage and housing market. It's Friday, June 26th at 10:00 a.m. in New York.
If we have to stop talking about the Knicks, we can stop talking about the Knicks. But Jay, I think one of the things, if we take a little bit of a step back in mortgage markets, in housing markets, in fixed income markets more broadly, from the beginning of the year to now, we've gone from the market pricing in two and a half cuts from the Fed by the end of 2026 to the market pricing in roughly one and a half hikes. A 100 basis point difference in market expectations over the course of the past five and a half months.
Now, that's happened at different times with different levels of of velocity and severity, but one of the key talking points we have now is we have a new Fed chair. We had the first FOMC meeting and his and his press conference after that last Wednesday. What do you think that means for for mortgage markets, for for volatility?
How are you thinking about this?
Look, Jim, it's a great question, and we've got asked that by a number of different investors. Chair Warsh has been pretty clear that he thinks people should do more of what they're good at and less of what they're not good at. And so, he's felt like the Fed should keep their communication on future guidance relatively short.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed policy
- mortgages
- housing market
- securitized products
- market recalibration
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “The Warsh Effect on Mortgages” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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