Trump's housing affordability bid: How it could impact investors
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There's a giant player in the financial markets who's changing the rules of the game. His name is President Trump.
Why it matters: In pursuing an affordability agenda, the president is making policy moves that investors have not accurately priced in.
What they're saying: "You are on the receiving end of policy — I don't think the market realizes this," Mohamed El-Erian, economist and advisor, tells Axios.
- "Affordability is driving not just policy outcomes, but will increasingly drive market outcomes."
State of play: Trump instructed Fannie Mae and Freddie Mac late Thursday to buy $200 billion in mortgage-backed securities in an effort to lower mortgage rates.
- On Friday, 30-year mortgage rates dipped below 6% for the first time since August of 2022 as the market priced in a possible buying spree.
- "It's like quasi-QE," said Calvin Yeoh, portfolio manager at the hedge fund Blue Edge Advisors, per Bloomberg, comparing the Fannie-Freddie buying to the Federal Reserve's purchases as part of its quantitative easing program. "It boosts demand for borrowing further out the curve."
- "What the market likes more than anything else is a non-commercial buyer, this notion that someone will buy regardless of price," El-Erian says.
- He points to the sovereign debt crisis in Europe in 2012, when Mario Draghi, then president of the European Central Bank, hinted at doing whatever it would take to support the euro. People believed him, demand skyrocketed, and bond yields plummeted.
- While it's unclear if Friday's moves lower in yields will stick, El-Erian believes the yield on the bench 10-year Treasury will be lower than it would have otherwise without the potential Fannie/ Freddie purchases.
Zoom out: A common refrain on Wall Street is that Washington policy tackles the demand side of problems that are often supply-driven. Take housing:
- Right now, there's a lack of affordable housing.
- Increasing MBS purchases in an effort to lower rates could shave 10 to 15 basis points off a mortgage, according to strategists, but in return, there could be a swell of demand from buyers who are eager for lower rates.
- That demand swell could in turn lead to higher prices.
- The U.K. offers a cautionary tale: Efforts to make mortgages cheaper for first-time buyers there fueled demand, which inflated prices, leaving affordability worse off.
Threat Level: The "nightmare outcome is they only try to operate on the demand side that pushes prices up, inflation as a whole goes up, and then you have a Fed that's on the wrong side of the inflation equation," El-Erian says.
Yes, but: Over the last year, rates have fallen, but demand didn't pick up.
- That's because people are holding onto homes longer and the economic vibes are weird, so fewer people are buying.
What we're watching: Whether more bond buying is coming.
- While $200 billion in purchases is relatively small for the $9 trillion MBS market, if the administration or the Fed indicate a willingness to buy more, that "could have a major impact on mortgage costs," El-Erian says.
- Administration officials have repeatedly told Axios that more details on the policy would come from Trump's speech at Davos.
Between the lines: What does this mean for investors?
- "You can no longer pursue broad themes, which was the message from last year," El-Erian says. "The message this year should be a lot more differentiation, a lot more bottom up."
The bottom line: It's a stock picker's market, and the winners and losers across asset classes are increasingly being defined by policy coming out of Washington.
