Mortgage Market Turmoil Sparks Housing Boom Concerns

"When combined with demand-fueled rising home prices and low inventory, these rising rates limit how competitive a potential homebuyer can be and how much house they can purchase," Sam Khater, chief economist at Freddie Mac, said in a statement.

The route in treasury and mortgage-backed bonds (MBS) has become more pronounced this week. Bloomberg explains: 

"...Treasury yields -- which strongly influence home-loan rates -- suddenly rise sharply, many Americans lose interest in refinancing their old mortgages. A reduced stream of refinancings means mortgage-bond investors are left waiting for longer to collect payments on their investments. The longer the wait, the more financial pain they feel as they watch market rates climb higher without being able to take advantage of them." 

A rising rate environment means investors who hold MBS must reduce the risk of loans on their books to counter the damaging effects of slower loan prepayments, also known as "convexity hedging."

The spread for Fannie Mae's 30-year current-coupon spread to the 5/10-year has blown out in the last couple of weeks - now around .8635 as the UST10Y surges above 1.50%. The reason for the blowout is that higher uncertainty surrounds the housing market when rates rise. 

The Fed's bubble-blowing in residential real estate during the pandemic was to create a wealth effect to offset the devastating blow the pandemic caused to the economy. In the process, these monetary magicians created soaring wealth inequality and housing affordability issues. 

So in the meantime, inflation fears and Fed bluff-calling send sovereign rates higher, which in turn drives convexity hedging forcing mortgage rates to rise, jeopardizing the housing recovery (amid a collapse in affordability).

Where is Powell??? 

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