What The Heck Is An MBS And What Does It Have To Do With Home Prices?

Could interest rates reach 10% again?
Hey gang there are a lot of forces brewing so I thought it would be helpful if I explained a little of what's going on and why there is a real possibility of 10%+ interest rates coming back

Before I get into it, if you haven't already seen The Big Short, I highly recommend it. Not only is it a fantastic movie, it shows how the crash of 08 happened. A lot of the things that we saw leading up to that crash is happening right now.  
So what the heck are MBSs and why should we even care?
 

MBS, which stands for Mortgage Backed Security, is the backbone of the mortgage industry. Without them, the landscape of home loans would be unrecognizable. 

Mortgage rates, although affected by the prime rate that the Fed sets, are more influenced by the demand for these MBSs.

Here's a quick 1 minute video explaining what MBSs are

if you own a home or are considering buying one, it's a good idea to familiarize yourself with them.

Now that you know what they are you might have caught on that the key to modern day mortgages is the ability for the banks to sell these loans to investors. 

So who buys these MBSs?

 

That's a great question Andy! 

The single largest buyer of these packaged MBSs is the Federal Reserve. 

A major shift happened to the MBS market last September: the Federal Reserve stopped buying them. In fact not only did they stop buying them, they started selling the ones that they had.

So think of it in terms of supply and demand. Imagine for a moment you were a successful Widget™ Manufacturer.

 

You made millions of Widgets™ each year but 95% of the ones you sold were bought by one customer.

Now imagine if that one customer not only suddenly stopped buying them, they started selling them as well! What do you think would happen to the value of your Widgets™?

 

That's right, they'd go down. 

...by a lot.

So for the mortgage market to continue, what needs to happen to the MBS market?

Two things:
1) other investors need to step up and fill that gap (more on this later)

but for that to happen we need...

2) the investments to be much much muuuuuuuuch more enticing.

So how do they do that?

By raising the rates.

That's the only way to continue to sell these loans that banks and mortgage brokers are creating. They have to make these loans more appealing to investors to purchase on the back end.

That's why there's a really good chance that rates will continue to climb, possibly into the double digits.

oof.... so after that bad news, here's a cute picture of a cat to lighten the mood:

 

More of a dog person...?

Rest assured, I'm keeping a close eye on the data and will continue to report the results to ensure you stay informed. But let's take it a step further. If you or anyone you know has questions about real estate or specific plans in mind, don't hesitate to reach out. I'm here to provide expert guidance tailored to your needs.

To take the first step towards gaining a comprehensive understanding of your property's current value in this evolving market, schedule a time to call me. Let's arrange a personalized home evaluation that will equip you with the insights you need to make informed decisions.

I hope you find these emails helpful. And remember, if you know anyone who might enjoy these newsletters as much as you do, please forward them to a friend.
Current Mortgage Rates

 
rates as of 5/25/2023
Real Estate in the News
-Forbes
 
New Home Sales in U.S. Boosted by Lack of Resales Inventory
-World Property Journal
 
-Redfin
 
-Realtor.com

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