This Week In A Nutshell: There’s a Fed meeting on Wednesday, but it’s unlikely to move mortgage rates. The key driver of rates recently have been White House policies (i.e., the $200B MBS purchase and Greenland).
Upcoming Attractions
Another light week on economic data, but there’s a Fed meeting, a potential government shutdown, and the possibility of further announcements on housing affordability.
- Fed meeting (Wednesday): There are three more meetings before the end of Jerome Powell’s term as Fed chair. Markets do not expect a cut at any of these meetings. The first meeting with a cut priced in is June 2026. Speaking of the transition, the President is expected to announce his nominee for Fed chair any minute.
- Government shutdown: After the shooting in Minneapolis this past weekend, Democrats raised the idea of blocking the remaining government funding bills that would keep the government open; funding lapses at midnight this coming Friday. That would impact the Department of Labor, which includes the Bureau of Labor Statistics (produces the two most important economic data releases, CPI and the jobs report), but not the Commerce Department, which includes Census and Bureau of Economic Analysis. Senator Chuck Schumer announced this afternoon that Democrats will speed up passage of bills that would fund everything except the Department of Homeland Security.
Last Week’s Highlights
Supreme Court hearing on Lisa Cook case: The Supreme Court heard oral arguments in the case concerning whether the president has the ability to fire Fed Governor Lisa Cook. The justices appeared unwilling to side with the White House. The case is being watched closely as the Fed fights for its independence.
Davos speech: President Trump spoke at Davos last week and White House advisors had promised a speech focused on housing affordability. In the end, the president only mentioned two initiatives that he had previously announced: a ban on investor purchases of single-family homes and $200B of MBS purchases by the GSEs. The White House had previously bandied about many other ideas; it would not be surprising to see those announced at a future date.
Diving a Little Deeper
As the GSEs begin to purchase MBS at the request of the White House, let’s examine what’s been happening with mortgage spreads. The White House and the GSEs are pursuing this policy because one way to lower mortgage rates is to lower the spread–or the difference–between 10 year treasury yields and 30 year fixed mortgage rates. Ten year treasury yields are determined by bond market investors and influenced by Fed policy. How much higher 30 year fixed mortgage rates are compared to 10 year treasury yields–the mortgage spread–is determined by a bunch of factors including supply and demand for mortgage backed securities (MBS) and if the borrower is likely to refinance quickly.
Historically, mortgage spreads averaged 170 bps between 2017 and 2019. During the pandemic, they dropped as the Fed purchased massive quantities of MBS. Starting in 2022, spreads increased quickly. They peaked in mid 2023 at 312 bps. That meant mortgage rates rose a lot faster than 10 year treasury yields in 2022 and 2023.
Since mid-2023, ten year treasury yields have risen from 3.67% to 4.14%, but mortgage rates have fallen from 6.79% to 6.06%. Why is that? It’s because the mortgage spread has fallen from 312 bps to 192 bps.
So the takeaway is that a smaller spread can help mortgage rates to fall even if ten year treasuries are increasing or flat. But we are getting pretty close now to the historical average. So there’s likely not much room left for this as a way to bring mortgage rates down.
Redfin Housing Market Reports
Home Sellers Outnumber Buyers By a Record Margin, Upping Buyers’ Bargaining Power
There were a record 47% more home sellers than buyers in December, giving the buyers who were in the market negotiating power.
The Sun Belt was home to the strongest buyer’s markets last month, while the Northeast and Midwest housed all five seller’s markets.
Mortgage rates have ticked down in recent days, which may boost the number of buyers entering the market in January.
U.S. Home Prices Inched Up 0.1% in December
U.S. home prices rose 0.1% from a month earlier in December on a seasonally adjusted basis.
Home prices increased 2.2% year over year, down from 2.6% in November and the slowest growth since 2012.
Prices fell month over month in 14 major metros, up from 12 last month. The biggest declines were in Houston (-0.9%), Pittsburgh (-0.6%) and Milwaukee (-0.6%).
