By the Numbers
Limited MBS supply should cushion the impact of taper
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Through most of the pandemic, the Fed and banks have combined to absorb all net MBS supply along with MBS sold by other investors. But the Fed is likely to start tapering MBS purchases this year and bank demand could slow at the same time. Other investors would likely demand wider spreads to pick up the slack. But slowing home sales has pulled net monthly MBS supply down, which should reduce the pressure on spreads when the Fed tapers.
Amherst Pierpont’s monthly net MBS supply model predicts that lower home sales should drop net supply from roughly $90 billion a month through much of 2020 to roughly $45 billion a month over the next year (Exhibit 1). The dark blue line shows historical net supply through August. Net supply fell sharply after the peak in April. The red line shows the forecast using home sales data through March 2021. The model accurately predicted supply in May but was too high in June through August, mostly because the forecast for new home sales was too high. The blue line shows the net supply forecast using the home sales data reported in August, and as a result is much lower than the March forecast.
Exhibit 1: Net supply should drop because of slowing home sales
August forecast assumes 5.88 million existing home sales and 740,000 new home sales. May forecast assumes 6.08 million existing home sales and 955,000 new home sales.
Source: Bloomberg, Amherst Pierpont Securities
The pace of home sales is a large driver of new supply in the agency MBS market. Existing and new home sales jumped during the pandemic, reaching the highest levels since early 2007. Both indices peaked in early 2021 but fell sharply in the spring and summer (Exhibit 2). The table shows historical home sales data as reported in through March and reported through August. The March columns also shows the Bloomberg consensus forecast for April and assumes the forecast will remain unchanged after April.
Exhibit 2: New home sales fell sharply after March
Gray italicized data from 5/12/2021 are projections using the consensus forecast reporting by Bloomberg at that time. The 9/30/2021 column includes revisions for January through March, and actual home sales from April through October.
Source: Bloomberg, Amherst Pierpont Securities
New home sales slowed sharply after the March report and the consensus forecast was too high. The new home sales data from January through March was adjusted lower; the March print fell 14.5%. And new home sales from April through August ranged from 16.6% to 28.3% below the consensus forecast. Existing home sales also slowed, but the March forecast was only 4% too high. Demand for homes remains strong, but the housing market is suffering a supply shortage. Tight inventory is suppressing home sales.
The Fed is expected to start tapering their MBS purchases soon, and lower net supply reduces the risk of spread widening. Banks had been the primary buyer of the excess supply, roughly $50 billion per month, that the Fed could not buy. But banks may not have been willing to boost their purchases higher as the Fed steps back. In fact, there may have been pressure to cut purchases at the same time. But now private investors are only buying roughly $5 billion each month and should find it much easier to grow that amount when the Fed starts to taper.
Brian Landy, CFA
1 (646) 776-7795
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