By the Numbers
Expect heavy net supply from strong home sales
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The net supply of agency MBS moved higher in the fall, buoyed by a pickup in existing home sales. Falling new home sales prevented an even larger increase. Net supply could average $60 billion a month in 2022 if home sales remain at the current pace. This will quickly become a challenge for markets to absorb as the Fed plans to stop growing its MBS portfolio by mid-March. And private investors may have to deal with even greater supply later in the year if the Fed stops reinvesting some of its MBS paydowns. Mortgage spreads are likely to keep widening unless home sales slow markedly or weakness in corporate earnings pushes money managers to reallocate into MBS.
The pace of home sales is a large driver of new supply in agency MBS. 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. Existing home sales rebounded close to the peak levels in the fall, but new home sales remain lower and was even revised lower in July and August. A shortage of new homes is the likely reason that new home sales did not keep pace with existing home sales
Amherst Pierpont’s net supply model predicts that net supply will average roughly $60 billion a month in 2022 (Exhibit 1). This is higher than the prior forecast of $45 billion a month, which used August home sales data. The increase is driven by the pickup in existing home sales, which caused the model to underpredict supply over the last few months. New home sales haven’t bounced back to the levels from early 2021, but the November reading is close to the level used for the August forecast.
Exhibit 1. MBS supply could average roughly $60 billion each month
The December forecast assumes 6.18 million existing home sales and 744,000 new home sales. The latter is slightly below Amherst Pierpont’s estimate of 750,000 and the median estimate of 770,000. The August forecast assumes 5.88 million existing home sales and 740,000 new home sales.
Source: Bloomberg, Amherst Pierpont Securities
Home sales are not the only factor that could affect MBS supply in 2022. The higher conforming loan limit should divert into agency pools more origination that previously would have been held in bank portfolios or sold into private-label securitizations. But Fannie Mae and Freddie Mac are raising fees on certain loans, which could push some production back to portfolios or private securitizations. And higher mortgage rates make housing less affordable, which might slow home sales.
The Fed plans to stop growing its MBS portfolio by mid-March, which means that all this net supply will end up with private investors. This should pressure mortgage spreads to continue to widen. And it appears the Fed is considering allowing the MBS portfolio to runoff starting later in the year, which would further boost the supply of MBS flowing to private investors and another negative for the basis. Coupled with the heavy supply from strong home sales makes spread widening likely. However, any weakness in corporate credit could boost demand from money managers and help limit the widening.
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