Episode Details

Although markets may recalibrate to a different policy playbook under the new Fed chair Kevin Warsh, housing could remain in a holding pattern. Our co-heads of Securitized Products Research Jay Bacow and James Egan explain why.

Read more insights from Morgan Stanley.

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Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley. 

James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. 

Jay Bacow: 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 10am in New York. 

James Egan: 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 2.5 cuts from the Fed by the end of 2026, to the market pricing in roughly 1.5 hikes. 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 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 press conference after that last Wednesday. 

What do you think that means for mortgage markets, for volatility? How are you thinking about this? 

Jay Bacow: 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. And so, with less forward guidance from the Fed, the market has more uncertainty, and more uncertainty translates into more volatility. 

And more volatility is generally bad for the mortgage market, given that investors are short the option to the homeowner to refinance. Furthermore, shifting from expectations of the Fed cutting to expectations of the Fed hiking generally makes it a little bit less favorable environment for investors like banks and overseas investors to come to the mortgage market. 

James Egan: Alright. Now, we've been on this podcast several times this year where we've talked about, you mentioned banks... We've talked about deregulation. We've talked about Fannie Mae and Freddie Mac, the GSEs – them buying mortgages, that being constructive for our mortgage view.

Is that still the case, or how are you layering that into your thought process? 

Jay Bacow: now? That's definitely still the case. Those things haven't changed. The deregulation is still flowing through the markets. That longer term should be supportive of bank demand in aggregate, although obviously there are a number of different regulations going through. The GSEs are still forecasted to buy 200 billion mortgages on behalf of President Trump's initiative. 

So, that's why we're just sort of tactically negative – those technicals are very strong in an environment where there really has not been much supply. Now, some of that supply is because mortgage rates are still in the context of 6.5 percent. Some of that is because with mortgage rates at 6.5 percent, there hasn't been that much housing activity. 

So, Jim, turning it to you, what is the outlook for the housing market in a world where they are expec