By the Numbers

Net MBS supply heading higher

| August 4, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Net supply of agency MBS averaged $15.8 billion a month over the first half of 2023 but should increase to roughly $33 billion a month over the second half if the current pace of home sales holds steady. Net supply appears likely to approach $30 billion in July, which would match the pace set in June. If the projection proves accurate, then supply will have averaged roughly $24 billion a month in 2023. Heavier supply over the second half of the year and a possible increase in supply next year is likely to soften MBS spreads.

Modeling net supply of MBS

The net supply of agency MBS has been falling since early 2022, when it stood near $80 billion a month (Exhibit 1). Home sales are a large contributor to net supply—many new homes are bought with agency mortgages, which adds to supply. Existing home sales also add to supply when home prices are increasing, which makes the new loan on a property larger than the loan that paid off. Net supply going forward consequently depends heavily on new and existing home sales along with home prices.

Exhibit 1. Net supply should increase over the second half of the year.

A three-month moving average is applied to each series. The forecast parameters were estimated from 2014 through 2019 using a SARIMAX (1, 0, 0)x(0, 0, 1, 12) process.
Source: MBA, Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

A supply model based on home sales tracks changes in supply closely in 2018 and 2019 but lags the sudden increase in 2020. It fit the average level in 2021 but missed some of the jumpiness that year. The forecasts lagged the slowdown during the first part of 2022 but fell in line later in the year and into 2023. One reason the projection may have lagged actuals is it does not account for sources of agency supply other than home sales. For example, new homeowners that borrowed against a previously unmortgaged property could have lifted supply. A sale of bank portfolio loans into agency MBS also would increase supply, as would a refinancing of a non-QM or other non-agency loan into an agency loan. The forecast includes time series components that help adjust for those errors, but the correction tends to occur on a lag.

Supply should increase for the rest of the year, from an average level of $15.8 billion a month in the first half to roughly $33 billion a month if home sales remain at the levels in the most recent releases in June. Forecasts that use the Mortgage Bankers Association’s and Fannie Mae’s housing forecasts project slightly higher numbers. Supply typically follows a seasonal pattern that peaks in the second half of the year, so an increase is not unusual. Supply has increased each month since March, reaching $30 billion in June, and should be close to that pace in July.

Beyond 2023, the forecasting process anticipates that net supply would trend lower if home sales remain unchanged. However, Fannie Mae’s housing forecast calls for slightly higher home sales, which lifts the supply projections. And the MBA’s forecast is even stronger, suggesting net supply should average over $40 billion a month in 2024 and 2025.

Accuracy over a year

Although supply is volatile and difficult to track accurately monthly, the forecasting process has generally done well over the course of a year (Exhibit 2). The forecast was generally within $2.5 billion a month of actuals, both in and out of the estimation period. Only 2013 and 2022 were outside those bounds. The forecast was generally accurate within 10% on a percentage basis, although the percentages were high in the early years when net supply was close to zero.

Exhibit 2. Agency MBS monthly net supply predicted vs actual.

Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Heavier supply could put some pressure on mortgage spreads, especially since these pools would come in production coupons. The market has readily absorbed the FDIC’s mortgage-backed securities sales over the past few months, but most of that was in deep discount coupons. The expected pickup in supply may not push spreads wider but should make it somewhat difficult for spreads to tighten.

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

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