China’s Threat To US Housing Market

Introduction to Rising Mortgage Rates

Mortgage rates are rising sharply this week, as investors sell U.S. Treasury bonds at a swift pace. Mortgage rates follow loosely the yield on the 10-year Treasury. Some speculate foreign countries could be dumping U.S. Treasuries in retaliation against President Donald Trump’s sweeping tariff plan.

Concerns for the Spring Housing Market

But there is another, even bigger, concern for both mortgage investors and for the all-important spring housing market. What if China, one of the largest holders of agency mortgage-backed securities (MBS), decides to sell those holdings as well in response to the U.S. trade policies. And what if other countries follow?

Potential Threats to the Housing Market

"If China wanted to hit us hard, they could unload treasuries. Is that a threat? Sure it is," said Guy Cecala, executive chair of Inside Mortgage Finance. "They’re going to look at pushing levers and trying to put pressure … Targeting housing and mortgage rates is a powerful driver of something like that."

Foreign Ownership of U.S. Mortgage-Backed Securities

At the end of January, foreign countries owned $1.32 trillion worth of U.S. MBS, or 15% of the total outstanding, according to Ginnie Mae. The top owners: Japan, China, Taiwan and Canada.

Recent Trends in MBS Holdings

China had already begun selling off some U.S. MBS last year, with the country’s holdings at the end of September down 8.7% year over year and down 20% by the start of December. Japan, which had shown gains in its MBS in September, showed a drop at the start of December.

Potential Impact on Mortgage Rates

If China and Japan were to accelerate those sales further, and if other nations were to follow, mortgage rates would rise even more than they are now.

Widening Spreads and Higher Mortgage Rates

"The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction," said Eric Hagen, mortgage and specialty finance analyst at BTIG. "Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective."

Impact on the Spring Housing Market

Widening spreads mean higher mortgage rates. The spring housing market is already floundering amid high home prices and weakening consumer confidence. Given the recent stock market rout, potential buyers are increasingly worried about their savings and their jobs. A recent survey from Redfin found that 1 in 5 potential buyers sells stock to finance their down payments.

Additional Pressure from the Federal Reserve

Hagen said selling of MBS by foreign entities could further spook the mortgage market. "The the lack of visibility for how much they could sell and their appetite for selling, I think that that would scare investors," he said. To add to the pain, the U.S. Federal Reserve, which is a major owner of MBS, is currently letting that MBS roll off of its own portfolio, as part of an effort to shrink its balance sheet. In other times of financial crisis, like during the pandemic, the Fed was buying MBS to keep rates low.

Conclusion

The potential for foreign countries to sell off their holdings of U.S. mortgage-backed securities poses a significant threat to the spring housing market. With mortgage rates already rising, any further increase could have a devastating impact on the market. The lack of visibility and uncertainty surrounding the situation only adds to the concern, making it a challenging time for investors and potential homebuyers alike.

FAQs

Q: What is causing mortgage rates to rise?

A: Mortgage rates are rising due to investors selling U.S. Treasury bonds at a swift pace, which is speculated to be in retaliation against President Donald Trump’s sweeping tariff plan.

Q: What is the concern regarding China and mortgage-backed securities?

A: The concern is that China, one of the largest holders of agency mortgage-backed securities (MBS), may decide to sell those holdings in response to U.S. trade policies, which could lead to higher mortgage rates.

Q: How much of U.S. MBS is owned by foreign countries?

A: At the end of January, foreign countries owned $1.32 trillion worth of U.S. MBS, or 15% of the total outstanding.

Q: What is the potential impact on the spring housing market?

A: The potential for foreign countries to sell off their holdings of U.S. MBS poses a significant threat to the spring housing market, which is already floundering amid high home prices and weakening consumer confidence.