Mortgages at 6% Pose Critical Test for Frozen US Housing Market

U.S. President Donald Trump announced on January 8 that he is directing the purchase of $200 billion in mortgage bonds to help bring down housing costs. The move is intended to reduce mortgage rates and make home ownership more affordable for Americans. The Federal Housing Finance Agency confirmed that Fannie Mae and Freddie Mac will execute the purchases.

Mortgage-backed securities (MBS) rallied in response, with spreads narrowing slightly. Trump's announcement came amid a broader effort to address housing affordability, which has become a political and economic priority ahead of the November midterm elections. Analysts have noted that while the plan could have a modest short-term effect, it remains unclear whether it will significantly alter the long-term affordability landscape.

The U.S. housing market has struggled with high mortgage rates and elevated home prices, limiting demand and slowing activity. Trump's plan aims to leverage the government-backed entities Fannie Mae and Freddie Mac to drive down borrowing costs. However, the impact of a $200 billion purchase in the $9 trillion MBS market is seen as limited by some analysts.

Why the Move Happened

Trump's decision is part of a broader strategy to restore affordability in the housing market, a topic he has highlighted in recent months. The president has also proposed banning institutional investors from purchasing single-family homes, a move aimed at curbing speculative buying and reducing competition for everyday homebuyers.

The housing market has been under pressure since 2022 when mortgage rates began rising rapidly. Home prices have also climbed, making it harder for buyers to enter the market. Trump's administration has faced growing pressure to find solutions that lower borrowing costs and stimulate housing activity.

How Markets Reacted

Mortgage lenders and housing-related stocks saw immediate gains following Trump's announcement. Companies such as loanDepot, Rocket Companies, and UWM Holdings experienced significant price increases. The Philadelphia Housing index and the MSCI US REIT Index also rose, reflecting optimism in the sector.

The move has drawn attention from investors and analysts who are monitoring how quickly Fannie Mae and Freddie Mac can execute the $200 billion purchase. The Federal Housing Finance Agency has stated that the purchase can be executed quickly given the available cash and capacity of the two entities.

What Analysts Are Watching

Economists and industry analysts remain cautious about the long-term effectiveness of Trump's plan. While the initial drop in mortgage rates is encouraging, many believe the effect may be short-lived unless broader structural issues in the housing market are addressed. These include a shortage of housing inventory and a lack of new home construction.

Some analysts warn that if mortgage rates fall without a corresponding increase in housing supply, it could lead to increased competition and higher home prices. This would potentially worsen affordability rather than improve it. The housing market needs more homes to truly become more accessible for a wider range of buyers.

Experts are also watching for signs that Trump's policies will have a meaningful impact on credit availability and consumer behavior. While lower mortgage rates may encourage more demand, they caution that without sufficient housing supply, the benefits could be limited. Analysts are monitoring the spring housing season to see if the current improvements in mortgage rates translate into more home listings and increased buyer activity.