Executive Summary
Morgan Stanley's securitized products team has identified a structural disconnect in housing that creates a counterintuitive investment opportunity. Despite mortgage rates falling to 5.75% by end-2026 and affordability improving from 'multi-decade challenged' levels, purchase volumes will only grow 3% - a response 10x weaker than historical norms. The culprit is the lock-in effect, which has created a market where even significant rate relief fails to unlock inventory or drive transactions. This creates a paradox: housing remains 'well supported' with 2-3% price appreciation, but volume growth stays anemic. The investment implication is profound - traditional housing plays face structural headwinds while mortgage infrastructure companies benefit from sustained spreads and GSE portfolio expansion. Listed inventories have already risen 30% from 2023 lows but remain 20% below 2019 levels, creating a Goldilocks scenario for mortgage REITs. The administration's proposed solutions (50-year mortgages, portable loans) face technical hurdles and would likely increase rates rather than decrease them. This analysis suggests the housing market has entered a new regime where modest improvements mask underlying structural constraints, creating opportunities in the mortgage financing ecosystem rather than traditional housing plays.
Key Insights
what Jay Bacow and James Egan (Co-Heads of Securitized Product Research) said“The only times where sales responded more tepidly than they just did in 2025 – were in 2009, the teeth of the Great Financial Crisis; and in 2020, when the market really slowed down in the immediate aftermath of COVID.”
what Jay Bacow and James Egan (Co-Heads of Securitized Product Research) said“We expect the GSEs to grow their portfolio next year, that would certainly be helpful. On the margin, we expect them to buy about a little less than a third of the net issuance that comes to the market.”
what Jay Bacow and James Egan (Co-Heads of Securitized Product Research) said“Based on our understanding of contract law... we don't think you can retroactively make mortgages portable or assumable that were not already portable or assumable... it would actually probably cause their mortgage rate to be higher, not lower.”
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