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- [00:01]
A
It's March and there's some madness going on. I'm Jay Bacow here with Jim Egan, noted Wahoo Wah fan.
- [00:08]
B
Hey, it looks like Virginia's gonna 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.
- [00:18]
A
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.
- [00:30]
B
And I'm Jim Egan, the other co head of Secur research at Morgan Stanley.
- [00:34]
A
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.
- [00:46]
B
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?
- [01:07]
A
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 Manon Ghassalia have spoken about, it's really going to help out the mortgage market in our view.
- [02:07]
B
All right, 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?
- [02:16]
A
Right. So it's important that 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, 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?
- [03:14]
B
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% 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 challenged affordability environment, but it's not as challenged as it's been over the past three years.
- [04:01]
A
All right, so affordability improving, it's still challenged though. What does that mean for home prices then?
- [04:08]
B
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% to 6% 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% 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 has slowed to about 1.3 to 1.5% right now. We've been here for four or five months, we think we're pretty much going to stay here. We're calling for 2% growth, so a little bit acceleration, but we think you're in a very range bound home price market.
- [05:34]
A
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
- [05:52]
B
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.
- [06:03]
A
Today, go smash that subscribe button.
- [06:07]
C
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