Episode summary
What Could Make U.S. Homes More Affordable
Thoughts on the Market (Morgan Stanley)
· · Hosts: Jay Bacow
Summary
Mortgage rates and U.S. housing affordability have improved over the past four to five months, but the market is still challenged. The discussion centers on why rates may fall further if banks return as buyers of mortgages, especially if upcoming regulatory changes give lenders more capital and more clarity about holding loans on balance sheet. The guest argues that lower mortgage spreads, not just lower Treasury yields, could be a meaningful driver of better affordability.
The guest says the biggest source of pressure on mortgage spreads has been weak demand from domestic banks, which own about $3 trillion of mortgages but have been largely absent from the market. If that changes, mortgage rates should come down, and that would help monthly payments on new homes. The episode notes that the monthly principal and interest payment on the median-priced home is already down $150 over the past year, about a 7% decline.
Even so, the guests do not expect a sharp rebound in home prices. They think improved affordability will eventually lift purchase volumes by 3% to 4% this year, but supply should rise alongside demand, keeping prices rangebound. Home price growth has slowed to about 1.3% to 1.5%, and the guest expects roughly 2% growth, with the market staying fairly subdued.
Key takeaways
- The guest argues that regulatory changes could free up bank capital and pull banks back into mortgage buying, which would tighten spreads and lower mortgage rates.
- Mortgage affordability has improved to its best level since the second quarter of 2022, with the median home payment down $150, or about 7%, over the past year.
- The guest says domestic banks own about $3 trillion of mortgages but have been largely absent because of regulatory uncertainty.
- Purchase volumes are expected to rise 3% to 4% in 2026, but the guest thinks the recovery will be gradual because affordability changes typically take about 12 months to filter through.
- Home prices are expected to stay rangebound, with the guest calling for about 2% growth as higher demand is offset by more supply.
Notable quotes
“the combination of these along with some other changes that are going to be coming from the Fed, the FDIC and the OC around, for instance, the GIB search charge”
“if the banks come back, that will cause that spread to tighten which will likely cause the mortgage rate to come down”
“we've been close to, if not at the lowest mortgage rate we've seen in 3 years”
“that monthly payment on the median priced home is down $150 over the past year”
“we think you're in a very rangebound home price market”
How the episode opens
It's March and there's some madness going on. I'm Jay Bakau here with Jim Egan, noted Wahoo Wah fan. 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.
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 Bau, 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, with everything going on in the world, we thought it'd be prudent to discuss the US mortgage and housing market. It's Thursday, March 12th at 10:30 a.m. in New York.
Jay, as you mentioned, there is a lot going on in markets right now. But hey, people need to live somewhere and those somewares 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?
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 DC with possible changes that could be helping out affordability, changes to the investor program, uh 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 in a proposal for the Basil Endgame by the end of this month.
And that proposal for the Basil Endgame is likely to make it easier for banks to hold loans on their balance sheet.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- mortgage rates
- home sales
- regulatory changes
- us housing affordability
- securitized products
Watch the episode
Watch “What Could Make U.S. Homes More Affordable” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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