Green says the Fed's MBS holdings and Fannie/Freddie bond buying could have more impact on mortgage rates than anything Warsh does with the benchmark rate
The Federal Reserve held rates at its June meeting, and Kevin Warsh gave brokers very little to go on about what comes next. The dot plot, the task forces, and the unanimous vote have dominated the conversation since.
However, the Federal Reserve’s balance sheet may need more attention. The Fed still holds a significant amount of mortgage-backed securities, and how aggressively it winds those down could move mortgage rates independent of the benchmark rate.
The 30-year fixed rate currently sits near 6.5%, according to Freddie Mac, with a fresh PCE inflation reading of 4.1% keeping rate cuts off the table for now. Marty Green (pictured top), principal at Polunsky Beitel Green, said the balance sheet and how it’s handled may be what moves rates, since a cut isn’t likely for a while.
"I think you're going to see rates kind of stay in the 6.25% to 6.5% range for the rest of the year anyway," Green told Mortgage Professional America. "The soonest you could kind of expect a rate cut would probably be December. That's probably the soonest you'd see one anyway."
Effects of balance sheet changes
Green said the task force on the balance sheet is the one he is watching most closely coming out of June's meeting.
"You still have a very large balance sheet that the Fed is still managing, and it still has a lot of mortgage-backed securities on it," he said. "The question is, are they going to want to wind that down differently than the pace they've had so far, and what impact does that have on interest rates?"
A rapid wind-down is unlikely given the risks involved, Green said. The Fed and the administration are also unlikely to move in contradictory directions.
"It would make no sense on the one hand for the administration to be buying bonds at the Fannie and Freddie level, but selling bonds at the Fed level," he said. "I think that you will see coordination on that. So I don't really see the balance sheet issue becoming much of a lever in the short run in terms of interest rates at all."
Green said the Fannie and Freddie bond buying has also been quietly supporting the rate environment in ways that have gone largely unnoticed.
"The buying of the bonds at Fannie and Freddie may have muted some of the increases in rates that you would have otherwise seen as a result of the conflict in the Middle East," he said. "With the conflict going away, the continued buying may actually have a positive impact on rates as well."
Inventory and aging housing stock
The housing market is holding together despite the rate environment, Green said. Inventory is rising, and buyers who accepted that cuts are not coming soon are starting to move. Some of that showed up in existing home sales earlier this month, which increased 3.2% on both a monthly and annual basis.
"We are seeing a decent amount of inventory on the home side that seems to be coming to market," he said. "The thought of rates not going down may have actually spurred people to go ahead and pull the trigger on some stuff."
Much has been made about the lack of housing supply available on the market. Green said the issue is more complicated than a simple unit shortfall. A report from the National Association of Home Builders in March said the median age of owner-occupied homes rose to 42 in 2024, up from 31 in 2005. Green said the jump affects replacement demand.
"You have upkeep issues, obsolescence, and other things there that may escalate what you need in terms of replacement inventory in the short run," he said. "You may have an overabundance of houses in certain places, and then you have a shortage in others."
On the rate path, Green said a gradual decline serves the market better than a sharp drop. A sudden cut would likely push prices up before supply can adjust, he said.
"If we gradually lower rates to kind of increase the sales pace, that would be very beneficial without necessarily needing to have a huge refi boom," he said. "You don't necessarily have to have a huge refi boom to really get some improved market presence with just a sales pace improvement to more of a normalized base."
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