Here’s How China Could Crush The U.S. Housing Market

Centrale punkter

At the end of January, foreign countries held $1.32 trillion worth of U.S. mortgage-backed securities, or 15% of the total debt, according to Ginnie Mae.

“If China wanted to hit us hard, they could dismantle the Treasury Department. Is that a threat? Of course it is,” said Guy Chakla, executive chairman of Inside Mortgage Finance.

The sale of MBS by foreign entities could further spook the mortgage market.

Mortgage rates rose sharply this week as investors sold U.S. bonds at a rapid pace. Mortgage rates loosely track the yield on 10-year Treasurys. There is speculation that foreign countries could dump U.S. Treasuries in retaliation for President Donald Trump’s sweeping tariff plan.

But there is another, even bigger concern for both mortgage investors and the housing market that is so important this spring. What if China, one of the largest holders of mortgage-backed securities, or MBS, decides to sell those holdings as well in response to U.S. trade policies. And what if other countries do the same?

“If China wanted to hit us hard, they could dismantle the Treasury Department. Is that a threat? Of course it is,” said Guy Chakla, executive chairman of Inside Mortgage Finance. “They’re going to put pressure on … targeting housing and mortgage rates is a powerful driver for something like that.”

At the end of January, foreign countries held $1.32 trillion worth of U.S. MBS, or 15% of all debt, according to Ginnie Mae. The top holders: Japan, China, Taiwan and Canada.

China already began selling some of its US MBS last year, with the country’s holdings down 8.7% year-on-year at the end of September and down 20% at the beginning of December. Japan, which had seen increases in its MBS in September, saw a decline at the beginning of December.

If China and Japan were to accelerate these sales even further, and if other countries were to follow suit, mortgage rates would rise even higher than they are now.

“The concern, I think, is on people’s radar screens, and is being raised as a potential source of friction,” said Eric Hagen, a mortgage and specialty finance analyst at BTIG. “Most investors are worried that mortgage spreads will widen in response to China, Japan or Canada coming in with a retaliatory target.”

Widening spreads mean higher mortgage rates. The housing market is already in turmoil this spring amid high home prices and weakening consumer confidence. Given the recent stock market slide, potential buyers are increasingly concerned about their savings and jobs. A recent Redfin survey found that 1 in 5 potential buyers are selling stocks to finance their down payments.

Hagen said the sale of MBS by foreign entities could further spook the mortgage market.

“The lack of visibility of how much they can sell and their appetite to sell, I think that will scare investors,” he said.

To add to the pain, the US Federal Reserve, which is the largest owner of MBS, is now letting MBS fall from its portfolio, as part of an effort to shrink its balance sheet. In other times of financial crisis, such as during the pandemic, the Fed has bought MBS to keep interest rates low.

“This is a source of potential pressure on top of this whole conversation,” Hagen added.