Name: The Housing Market’s About to Get Ugly - Prepare Now!
Uploaded: 2025-10-15T18:18:18.000Z
Duration: 13 min 59 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

Adverbs of degree

The Federal Reserve just made an important announcement about the housing market.

It signaled to the market that the housing market is no longer going to be the same.

With each consecutive year, buying a house will become more and more difficult.

If you think that I am exaggerating, let me explain what exactly the chairman of the Fed said and how that is going to impact the market.

The housing market or the housing prices consist of two main factors.

The main factor is of course, the price of the house.

And prices have been rising dramatically.

However, if you look at what's happening recently in the last two to three years, at least since 2022, you see that house prices are fluctuating.

But overall they are no longer rising as fast as they have been back in 2020 and 2021.

As if there is not enough demand to push prices higher, house prices have reached to a level where the vast majority of people cannot possibly buy a house.

Maybe sometime in the future those prices are going to come down.

But house prices is just one part of the equation.

The vast majority of people buy houses with a mortgage.

So the numbers that we have to pay attention to are the mortgage rates.

If mortgage rates are going to come down and house prices are still the same, people will still be able to afford houses.

Housing yet again will become affordable.

But if you look at the mortgage rates, suddenly you won't see actually really great news.

Yes, they have slightly calmed down, but they have been fluctuating over the last couple of years.

The real question that we should be answering is that what exactly determines the mortgage rates?

Most people tend to think that if the Federal Reserve will lower the interest rate, mortgage rates will naturally come down.

But over the last couple of months, the Federal Reserve has lowered interest rates.

Last year in September and November, most likely, the Federal Reserve has also lowered down interest rates.

But if you look at the mortgage rates, they have actually grown in the beginning of 2025 and there hasn't been any significant decrease in in mortgage rates.

So there might be many other factors that influences the mortgage rates besides the Federal Reserve's interest rates.

Now, to understand who sets them, you have to understand how housing works.

Imagine you have a lot of mortgages, 1, 2, 3, and then thousands of mortgages in the market.

These mortgages often are turned into mortgage backed securities and are sold to investors.

And the demand for these mortgage backed securities determine what is going to be the mortgage rate in the market.

If there is very strong demand for these mortgage backed securities, then investors can sell them by providing lower interest rates.

there's so many people are willing to lend you money, you will provide them with a lower interest rate.

But what if you are bad with money and nobody is willing to gamble their money with you?

You took money from your friends in the past, but did not give them back.

You took money from your neighbors and then you blocked them on WhatsApp.

And that's why now the risks to loan you money are much higher.

And that's why if you want to borrow money now, you will offer a much higher interest rate in order to worth the risks.

And that's exactly how any investment works.

So the question that we have to answer is that is the demand for mortgage backed securities is rising or the demand for the mortgage backed securities is falling down.

There are three main sources for the demand for the mortgage backed securities.

The first one is of course local investors, average normal investors who have extra money and they want to invest it somewhere so they could be buying mortgage backed securities.

We have institutional investors such as financial institutions, hedge funds, huge banks such as Wells Fargo, Citi or JP Morgan.

There is always some kind of a demand for mortgage backed securities because they are backed by real houses.

And because these houses have intrinsic value within themselves, they the risks for them to be defaulted is extremely low.

Yes, there is always some kind of a risk, especially after the 2008 financial crisis.

But nonetheless, a lot of financial institutions are ready to keep a portion of their investments in mortgage backed securities.

While it's very difficult to track how strong is the demand for mortgage backed securities, we can take a look at how strong the demand for the ETFs that invest in mortgage backed securities.

Now an ETF is a financial institutions that take investors money and invest them in certain type of assets.

So we have ETFs that invest in a certain industry, for example a tech industry.

We have ETFs that exclusively invest in car companies.

So they take investors money and they will only invest in car companies.

We have ETFs that invest only in real estate and then we have ETFs that exclusively invest only in mortgage backed securities.

MBS ETF is one of those ETFs that exclusively only invests in mortgage backed securities.

And by tracking the price of this ETF we can figure out how strong is the demand for mortgage backed securities.

Since the creation of this ETF, the demand has been extremely strong.

Even during the 2008 financial crisis, there was still some demand for these mortgage backed securities.

However, in 2022, something happens and the demand for mortgage backed securities completely collapses.

And even though that three years almost has passed since the Federal Reserve has hiked interest rates, that demand hasn't actually recovered.

In fact, if you look at the numbers over the last year, you don't see a real difference.

It has been rising slightly and then dropping after that.

But overall the demand has not recovered over the last 12 months.

So the appetite of investors within the United States for mortgage backed securities isn't that strong.

So there isn't strong demand, which is why mortgage rates are not falling down.

But local investors are not the only investors who are buying mortgage backed securities.

The second big or the largest investor in mortgage backed securities is the Federal Reserve.

Now, the Fed should not intervene in MBS in the first place, but to save the economy.

Back in 2008, Federal Reserve decided that it will start buying mortgage backed securities.

But it's actually extremely risky and extremely bad for the market.

It was because of the Federal Reserve that house prices have skyrocketed back in 2020 and 2021.

And now the Federal Reserve is on a to further lower its balance sheet to get rid of all of the mortgage backed securities that it have purchased in the past.

It started tightening its balance sheet back in 2022 as you can clearly see on this graph.

And currently it's sitting on about $2.1 trillion of mortgage backed securities.

And the Chairman of the Fed made it clear that we want to continue tightening and continue selling all our mortgage backed securities.

So when you're selling, you're increasing the supply of mortgage backed securities in the market while there isn't enough demand in the market which is leading mortgage backed securities to rise or which is leading mortgage rates to rise.

Consistent with our long standing guidance, we aim for a portfolio consisting primarily of treasury securities over the longer run.

So Federal Reserve wants to get rid of the mortgage backed securities so that the balance sheet of the Fed primarily only consists of treasury bills.

So it will continue funding the government, but it won't continue funding the housing market.

And that's most likely because the US Government debt is rising so much that the Federal Reserve has to prepare itself to keep buying more and more US Government debt.

Because the demand for the US Government debt isn't as high as it was in the past.

And secondly, that debt has grown to such a level that there might not be enough wealth in the world to buy so many U.S.

And that's why the Federal Reserve might be getting rid of the mortgage backed securities to make sure that it has the ability to buy more U.S.

treasury bills to help the government to avoid any kind of a default, any charm in the future.

The third party that invests in mortgage backed securities are foreign investors.

People outside the United States who see a very great opportunity in the United States who want to make money with deep pockets who are ready to invest in the United States.

And investing in the housing market through mortgage backed securities is one of the best ways to do that.

So here is what foreign entities would do.

Since the United States is an import driven economy that based on consumption it has one of the or had one of the lowest tariffs in the world.

So bringing stuff to the United States and selling them in the US was one of the best businesses you could make.

And that's why the United States had some of the largest trade balances with the rest of the world.

It is very rare that the United States had a trade surplus with any country.