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  • Jonathan Poyer

Residential Mortgage Market - A Good Place to Invest? A Safe Place? Let's Take a Look

Bond markets, although generally complacent in our opinion, remained slightly on edge as Treasury bonds sold off, sending the 10-Year Treasury yield from 3.88% to 4.20% in the quarter.

Ultra-long Treasuries fared worse, posting losses of over 5% as economic data remained strong. Mortgage rates, which tend to track the Treasury bond market, were roughly flat at 6.75%, although jumbo rates narrowed given credit spread tightening in non-Agency RMBS.

The market’s assumption of a rate cut at the beginning part of the year proved to be wrong. We believe one major reason is that that the U.S. mortgage market is largely fixed rate and a majority of borrowers have locked in low rates. This has cushioned the economic impacts of monetary policy tightening more so than in other countries where a larger percentage of borrowers have variable rates.

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.

Distressed selling is required to drive prices down meaningfully and a historic amount of borrower equity is likely to preclude that event. While home prices will likely decline in some urban areas and parts of the country that saw parabolic appreciation over the last few years, on a national level home prices are likely to be stable.

Mortgage rates are likely to remain elevated in the short term but decline later in the year with longer term rates. Residential mortgage defaults will likely remain low given the aforementioned dynamic of borrower equity as well as a resilient economy. Also, given the “trapped equity” that many people have in their homes, we are likely to see increasing origination in second lien mortgages, reverse mortgages, and home equity investments. Certain originators of these products who are publicly traded will likely benefit from this, as well as structured credit investors who are able to source bonds at attractive yields.

Overall, we like the risk profile of residential compared to commercial real estate. For homeowners who have been in their homes for at least the past 3-years, we see strong fundamentals and credit profiles to keep us optimistic about this corner of the market.

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