The U.S. real estate market is gigantic reaching well into the Trillions of dollars. U.S. Housing is the world’s largest asset class. The residential mortgage debt market alone is north of $10T. Mortgage-backed securities are around $6T. In a market this size, there will always be pockets of inefficiencies and opportunities.
Well, what if we said that the residential real estate market is the best place to invest right now? Obviously, we do not mean residential real estate in its entirety. But what if we just narrowed the field to include homeowners who have been in their homes for at least 5 years?
What do we mean:
Low housing inventory should limit price declines caused by rising rates
Millenials and Gen Z are entering the homeownership market
Mortgage underwriting is strict
Work-from-home culture is here to stay
Baby-Boomers are staying put and “aging in place”
Let’s dig a bit deeper into this as there are headlines galore touting all sides of real estate – the best of times and the worst of times.
By May 18th, the average 30-year mortgage rate ticked up to 6.39%. One year ago, the rate was 5.10%, 2 years ago 3.00%, and its low point over the past 5-years was 2.65% on January 7th, 2021. Granted, in the 1980s, the 30-year rate was above 18%, but we have still seen a marked uptick:
However, while rates have gone up and appear to be moving even higher, the average interest rate on debt outstanding is the lowest in over 43 years at 3.5%.
In addition, the share of owner-occupant households with a mortgage is at a 25 year low of 61.3%; which means nearly 40% of homeowners own their homes outright. The loan to value index is also at a 25 year low of 25.8%. Furthermore, only 2.1% of mortgaged U.S. homes have negative equity.
For these homeowners in their homes, their equity can increase from either rising home prices or decreasing mortgage loan balances. Each month, when a payment is made, a greater percentage of the payment goes to principal:
And speaking of payments, U.S. mortgages have lowest delinquency levels in 20 years and are the lowest out of all loan types, making up just 2.1% of all 90+ delinquent loans. The percent of balances 90+ days delinquent is 0.4%. Compare that to credit cards and auto loan delinquencies at 7.7% and 3.7% respectively.
The majority of these borrowers have fixed rate mortgages as adjustable-rate mortgages dropped to 2% of all mortgages in 2022. Compare this to 2006 when adjustable-rate mortgages made up 50% of all mortgages in 2006.
And lastly, we are at near record lows when it comes to existing home sales supply. The housing inventory in the U.S. remains the lowest on record. In 2022, the percent of U.S. homes for sale was 0.50% of total housing, the lowest value since 1965 (57 years). The average, from 1965 to 2022, is just about 1% with the peak being around 2008.
What we are seeing is a historical inversion of the homeowners’ balance sheet. Today, the mortgage at 3.5% is the asset and the house is now the liability. These folks will do whatever they can to keep that asset and remain in their homes. There are no better options. They will not be walking away from the home. They will rearrange their finances to pay their mortgage. And, from an investment perspective, the homeowner has significant equity in their home that will only grow as time goes on.
There just might not be a better investment option out there than residential real estate.