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

Washington, D.C. – As mortgage rates surge and global financial markets reel from escalating trade tensions, analysts are warning that China could have a powerful lever to disrupt the U.S. housing market—and may be preparing to use it.

The concern centers on agency mortgage-backed securities (MBS), a key component of the American housing finance system. At the end of January, foreign countries held $1.32 trillion worth of MBS, representing 15% of the total outstanding, according to data from Ginnie Mae. Among the top holders: Japan, China, Taiwan, and Canada.

Now, amid a flurry of economic retaliation following President Donald Trump’s sweeping tariff actions, experts say a foreign selloff of these securities—especially by China—could further destabilize mortgage markets, pushing borrowing costs even higher at a time when the housing sector is already under pressure.

A Ticking Time Bomb in the Bond Market

“If China wanted to hit us hard, they could unload Treasurys. Is that a threat? Sure it is,” said Guy Cecala, executive chair of Inside Mortgage Finance. “They’re going to look at pushing levers and trying to put pressure. Targeting housing and mortgage rates is a powerful driver of something like that.”

While much of the recent focus has been on foreign selling of U.S. Treasury bonds, which has already pushed yields higher, analysts are growing more concerned about agency MBS, which are closely tied to mortgage rates.

Mortgage rates tend to move with the 10-year Treasury yield, but spreads between MBS and Treasurys can widen when demand for MBS declines. This means that foreign selling could have a disproportionate impact on home loan rates, potentially spooking buyers during the crucial spring home-buying season.

China Already Quietly Cutting Exposure

China has already begun paring its MBS holdings. Data shows that by September 2024, Chinese holdings of U.S. mortgage securities were down 8.7% year over year, and by December, they had fallen 20% from prior levels. Japan, too, showed signs of slowing purchases during that period.

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

A selloff of this magnitude by multiple countries could lead to a sharp rise in mortgage rates, which would further strain housing affordability—a market already battling record-high home prices and declining consumer confidence.

Housing Market Already on Edge

The U.S. housing market has shown signs of fragility in recent months. Homebuyers are increasingly nervous amid volatile markets, inflation, and job security concerns. A recent survey by Redfin revealed that 1 in 5 prospective buyers are selling stock to fund their down payments—a sign of financial anxiety.

Rising rates would further undercut affordability, pushing some buyers out of the market entirely.

“The lack of visibility for how much [foreign entities] could sell and their appetite for selling—I think that that would scare investors,” Hagen noted.

The Federal Reserve Steps Back

Compounding concerns, the Federal Reserve is also letting MBS roll off its balance sheet as part of its broader balance sheet reduction. During past crises, such as the COVID-19 pandemic, the Fed had been an active buyer of MBS to stabilize rates and support housing demand.

Now, the absence of the Fed as a buyer could exacerbate the impact of any foreign selloff, removing a crucial backstop from the market.

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

A Perfect Storm Brewing?

While there’s no confirmation that China or others will act decisively, analysts agree that the threat is real—and could be triggered in retaliation to broader geopolitical developments. With Trump’s latest tariffs creating waves across global supply chains, foreign policy decisions may soon hit home—literally—in the form of higher monthly mortgage payments and weaker home sales.

For now, policymakers and investors are watching closely. The U.S. housing market, which has proven surprisingly resilient in recent years, may be about to face one of its most unpredictable tests yet.