The 'Warsh effect' on housing: How the new Fed Chair could keep mortgage rates painfully high

Bad news for home buyers: Kevin Warsh likely isn’t coming to the housing market’s rescue.

The new Federal Reserve chair acknowledged that high mortgage rates are throttling transcation activity, but the top central banker doesn’t look like he’s in a rush to do any favors for the US housing market. That means mortgage rates will likely be volatile, and will stick around at their current elevated levels, Morgan Stanley strategists are warning.

Jay Bacow and James Egan, the co-heads of securitized products research at the bank, pointed to what they dubbed the “Warsh Effect” on the housing market, with mortgage rates trending higher than levels when Warsh was first nominated for Fed Chair.

The average rate on the 30-year US fixed mortgage jumped to 6.49% in the week leading up to June 25, up from the trough of 5.98% earlier this year.

The move in rates largely reflects higher interest rate expectations across the entire economy, given Warsh’s hawkish stance on monetary policy, Bacow said in a recent episode of Morgan Stanley’s “Thoughts on the Market” podcast. In comments following the last Fed meeting, Warsh reiterated the central bank’s commitment to bringing inflation back down to its 2% price target multiple times.

Rates have also trended higher amid fears that inflation will flare up again amid the Iran war. Warsh was also among the more hawkish Fed Chair candidates on President Trump’s shortlist.

The housing market could also be hurt by Warsh’s stance that the Fed should issue less forward-looking guidance on the direction of interest rates, Bacow added.

“With less forward guidance from the Fed, the market has more uncertainty, and more uncertainty translates into more volatility. And more volatility is generally bad for the mortgage market,” Bacow said, pointing to how increased volatility could cause those investing in mortgage-backed securities to be more hesitant to buy new issuance, which causes mortgage rates to move higher.

Other housing forecasters are also anticipating more pain for refinancers or new mortgage borrowers deeper into Warsh’s tenure.

The National Association of Home Builders said it anticipated Warsh to continue reducing the Fed’s balance sheet, a strategy for monetary tightening that can “place upward pressure on long-term interest rates ahead.”

Zillow said the Fed striking a “more hawkish” tone was a key factor preventing rates from moving lower.

“Affordability could shift from being a modest tailwind relative to last year to more of a headwind, especially for listings and sales comparisons,” Kara Ng, a senior economist at Zillow Home Loans, wrote of the outlook for housing.

“Warsh noted multiple times that the housing market is one of the few places where the current level of rates is holding activity back, but the Fed is uninterested in coming to the rescue,” Chen Zhao, an economist at Redfin, wrote in a recent note.