Mortgage REITs (represented by FTSE NAREIT Mortgage Plus Capped Index) posted a return of roughly -3% for the quarter. This subsector underperformed the broader equity REIT index (S&P US REIT Index, +0.01% for the quarter) despite having significantly less risk tied to commercial real estate.
Mortgage rates, which tend to track the Treasury bond market, continued to be relatively sticky around 7% given the tight range of spreads between mortgages and risk-free rates.
With rates as high as they are, there is definitely a lock-in effect for homeowners. The effective rate of interest on mortgage debt outstanding is just 3.8% compared to new rates which are hovering at that 7% number:
You can see here what the breakdown of rates look like year over year. The breakdown is as you might expect:
The good news, is that mortgage delinquencies are the lowest of all loan types, making up just 2.4% of all 90+ delinquent loans. Compared to credit card delinquencies at nearly 11%:
You can see that these delinquency rates are well below historic averages:
Furthermore, the delinquency trend continues to fall along with foreclosures:
Higher rates, however, have impacted existing home prices and the existing number of listings:
The demand for housing has put pressure on builders to build and they have been doing just that. However, new builds are at smaller sizes than the existing stock of houses and make up a much smaller proportion of inventory and the market in motion:
This supply/demand imbalance has continued to push up prices with the national average around $450K:
It is important when considering the market to really understand how mortgage rates impact affordability. Rates at 3.5% would have home affordability around $407K. With rates at 7.5%, we are looking at the same house $261K. A 5.5% mortgage rate would be equivalent to a $322K home. This sheds light into the actual impact of the lock-in effect:
There are just not enough homes available for existing homes.
Single-family housing will likely remain the bright spot in the real estate market. Single-family residential mortgages do not face the refinancing risk that commercial real estate is dealing with since residential mortgages tend to be fixed for 30 years vs. much shorter maturities typically for commercial real estate. An underproduction of residential housing over the last decade combined with mortgage borrowers’ unwillingness to give up their low mortgage rates will likely result in continued low housing supply. While there has been a recent slight uptick in housing supply coming from new construction, distressed selling is required to drive prices down meaningfully and a historic amount of borrower equity is likely to prevent this.
While home prices will likely decline in some urban areas and parts of the country that saw outsized appreciation over the last few years, on a national level home prices are likely to be stable.
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