America’s housing market is paralysed by an affordability crunch.

First-time buyers are locked out of home ownership, mortgage rates are at a 23-year high and house prices have skyrocketed since the Covid pandemic.

Donald Trump believes the solution lies in stimulus.

In an unprecedented move on Thursday, the US president announced he would direct American mortgage giants Fannie Mae and Freddie Mac to embark on a major mortgage bond buying programme.

The president wrote on Truth Social: “I am instructing my representatives to buy $200bn in mortgage bonds. This will drive mortgage rates down, monthly payments down, and make the cost of owning a home more affordable.”

Mortgage rates duly dropped to a three-year low. Shares in US housebuilders and home lenders boomed on hopes of a housing market recovery. United Wholesale Mortgage, America’s largest mortgage lender, surged by more than 14pc on the announcement.

Investors are betting that more stimulus is in the pipeline. Trump has promised “more housing and affordability proposals” in his speech at the World Economic Forum in Davos next week.

The president is scrambling to show he is tackling cost-of-living pressures in America, something which he claimed on the election campaign trail would be a “day one” task and which voters are increasingly blaming him for failing to deliver on.

His approval ratings on the economy have tanked and he knows this will cost him at the midterm elections in November. Easing the strain in the housing market will be key to keeping middle-class voters on side.

But analysts warn Trump’s bond-buying plan will deliver little more than a short-term sugar rush of housing demand. And his strategy is a risky one that could push up house prices and overall inflation.

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“You could look at it as backdoor quantitative easing,” says James Lockhart, who became director of the Federal Housing Finance Agency (FHFA) when it was created by President George W. Bush during the financial crisis.

A house price surge during the pandemic made homes far more expensive, just as a rise in mortgage rates to a 23-year high made it far more costly to borrow. The monthly cost of a typical home loan is now $2,665 – two thirds more than before the pandemic.

Homeowners who purchased when mortgage rates were low cannot afford to move, sending housing turnover to a 30-year low. The median age of all homebuyers last year hit a record high of 59, up from 31 in 1981.

Trump’s solution is to turn to Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back about 60pc of America’s $12tn mortgage market and nearly went under during the global financial crisis. For more than 17 years, they have been under government conservatorship, meaning they are run by the FHFA and their loans are backed by a government guarantee.

Fannie and Freddie support the mortgage market by purchasing mortgages that have been originated by lenders. They package these loans up and sell them on to institutional investors as mortgage-backed securities (MBS). The process means that mortgage providers have more cash to grant more loans.

Before the financial crisis, Fannie and Freddie also purchased MBS aggressively. By 2008, each had MBS portfolios totalling around $700bn. It was these portfolios, which were backed by mortgages that were poorly underwritten, that pushed them to the brink of collapse during the subprime mortgage crisis.

Today, between them, they hold $247bn of MBS. Purchasing another $200bn will take them up to the limit of what they are allowed to buy under their preferred shareholder agreement with the Treasury, but it would not breach it. Regulatory changes introduced in the wake of the financial crisis have strengthened mortgage underwriting and reduced the default risks attached to MBS.

Higher demand for MBS increases the price that lenders can receive for selling the bonds and means they are able to offer borrowers lower mortgage rates.

The market impact has been immediate. On Friday, the average rate on a 30-year fix dropped from 6.21pc to 6.06pc, the lowest level recorded since February 2023, according to Mortgage News Daily. UBS analyst John Lovallo expects rates could settle at 6pc.

This would still be double the rates seen during the pandemic, but any reduction will mean higher buyer demand for homes.

The Dow Jones US Home Construction Index has soared by 6.9pc since Trump’s Truth Social post. Lenders Rocket Mortgages and LoanDepot have jumped by 9.3pc and 18.9pc.

But Jim Parrott, of Parrott Ryan Advisors, which advises financial institutions on housing finance, warns that the boost will be short-lived.

“The market will be juiced for a bit, but as soon as the $200bn in spending money is depleted, the sugar rush will end and we’ll end up with mortgage rates largely where they are today,” he says.

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Aaron Klein, senior fellow at the Brookings Institution and a former Treasury official, warns that the policy is counterintuitive because it will drive up house prices.

Higher demand for MBS will make banks keen to lend larger mortgage sums, says Klein. “That makes homes more valuable, which makes it harder for people who don’t own a home to buy one.”

Lovallo warns there could be wider inflationary risks. Bringing mortgage rates down could spur activity not only in housing but in other parts of the economy, he says.

“The risks would be does this pull back in mortgage rates reignite inflation again?”

The biggest question is what Trump will do next. He could take steps that could mean far larger drops in mortgage rates.

One of the most obvious other levers he can pull would be reducing the guarantee fees (g-fees) that the GSEs charge on their MBS for guaranteeing the payment of the principal and interest on the loans, says Lovallo. This fee adds about 0.65 percentage points to the mortgage rate on a 30-year fix.

“If they’re under full conservatorship, they can reduce the g-fee to zero. That would be 65 basis points off a mortgage rate.”

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This would have a big impact on demand, but it could also increase supply because it would free up existing homes whose owners have been unable to move, says Lovallo.

Historically, in a normal year, there would be around 5.5 million existing home sales in the US. For the last three years, the total has been around four million. Restoring market turnover could offset the potential for house price inflation from higher demand, says Lovallo.

It is possible that Trump could also turn to the Federal Housing Administration loan programme, which insures loans to allow buyers to use smaller deposits, or opt for some kind of system of subsidies, says Lockhart.

But the president needs to tread carefully. “The concern is, if he does too much – some sort of subsidy that increases government deficits – then long term rates could actually go up, and again it would be counterproductive,” says Lockhart.

Trump’s policies also cast doubt over his plans for a stock market listing of Fannie and Freddie.

“The thing that is probably most significant about all of this is the fact that the president of the United States has now decided to use the GSEs and their portfolios, as instruments of public policy,” says Parrott.

“It signals to possible investors that the GSEs are going to be subject to probably significant swings in their profitability depending on how they are used in government. The more they’re used like government utilities, the less they’re allowed to function like privately-owned institutions, which is going to cast a shadow for those being asked to invest in them.”

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