China could rattle U.S. housing market, analysts warn

But a more significant risk may lie in China’s holdings of agency mortgage-backed securities (MBS).

According to data cited by CNBC, foreign governments held $1.32 trillion of U.S. MBS as of January, representing 15% of all outstanding securities. China, along with Japan, Taiwan and Canada, ranks among the largest holders.

Eric Hagen, a mortgage and specialty finance analyst at BTIG, told CNBC that foreign selling is “on folks’ radar screens” as a potential geopolitical pressure point.

“Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective,” he said.

China has already started reducing its MBS exposure. CNBC reports that the country’s MBS holdings were down 8.7% year-over-year by the end of September, and down 20% by early December. Japan followed a similar trend, shifting from growth to contraction in its MBS positions in late 2023.

If China and Japan were to accelerate those sales and if other nations followed suit, mortgage rates would likely rise further, squeezing both the housing market and mortgage investors, CNBC said.

A widening of spreads — the difference between Treasury yields and MBS yields — would mean even higher mortgage rates.

Hagen also emphasized that uncertainty surrounding how much foreign entities might sell could rattle investors even more.

“The lack of visibility for how much they could sell and their appetite for selling, I think that that would scare investors,” he said.