Proprietary Data Insights
Top Mortgage REIT Searches This Month
Read It And Weep. Then Rent. Then Weep Again.
There are several ways to look at housing, particularly the prospects of a crash.
If home prices fall (as they are), crater, or even crash, what happens to current homeowners? The Juice covers that part of the equation in a minute with some interesting and, believe it or not, encouraging data.
The other big question – what happens to affordability for prospective homebuyers? As we pointed out earlier this week, not much. For two primary reasons.
One, there’s the down payment. If we go with $450,000 as the typical price of a home nationally, you’re looking at $90,000 if you put 20% down. That’s a meaningful amount of money for lots of people. A 10% decline brings the typical home price to $405,000, dropping the down payment to $81,000. Realistically, this relatively small decrease in how much you need to save doesn’t remove this initial obstacle to home ownership for enough people to make home buying even close to broadly affordable again.
Not nationally and definitely not in the more expensive markets where the typical home easily hits high six figures and, in some cases, north of a million bucks.
Source: Mortgage Rates Daily
Two, there’s the monthly payment. Mortgage interest rates drive this. Even more than the record cost of a home.
Consider the hypothetical, but potentially very real example, The Juice illustrated earlier this week:
Let’s say a couple months ago, you came across a $1.1 million home in Los Angeles. At the time, you could maybe get a 5.0% interest rate on a 30-year mortgage.
With 10% down, you’d be looking at a $990,000 mortgage loan.
Your payment would have been $5,315 a month.
Fast forward to today. You read the headlines about this cooling housing market, even and especially in places such as LA.
Take Black Knight’s estimate of a 4.3% decrease in prices in LA and that $1.1 million properly now costs $1.053 million. We’ll say the seller is antsy and lowers the asking price to a psychologically alluring $999,999.
Assuming this doesn’t trigger a bidding war, with 10% down you’d be on the hook for a $900,000 loan. At a 5% interest rate, your monthly payment would be $4,831.
However, as of the end of August, interest rates are back up to 6%. This takes your monthly payment to $5,393, which is actually higher than it was before this recent cooldown.
That was last week!
To kick off this week, the rate on a 30-year mortgage jumped to 6.25%.
This brings our hypothetical monthly payment to a whopping $5,541. A whole $148 higher thanks to a 0.25% interest rate increase.
So, what are people doing who can’t come up with the down payment and/or handle the monthly payment?
Which clearly explains why rent prices continue to rise across the nation, even as home prices start to fall.
Lots of people have money. Just not enough money to buy, thanks largely to the rates. So they wait and rent. And wait and rent some more.
All of this said, there is some good news. Don’t expect an all-out mortgag-driven housing crash to occur anytime soon. Scroll with The Juice for the encouraging numbers.
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Will There Be A Housing Crash?
The good news is quite straightforward:
We’re unlikely to witness a 2008-like epidemic of homeowners going underwater on their mortgages. This is because less than 0.5% of homeowners owe more on their mortgages than the value of their property.
According to mortgage researcher Black Knight, there’s little chance of large enough swaths of the population to make it matter going underwater on their mortgages:
And, in the 15% scenario, people who purchased their homes in 2021/2022 would make up more than 90% of homeowners underwater. These are the homeowners who bought at today’s record prices and, quite possibly, at 5% or even 6%-plus interest rates.
So the mortgage market is healthy, even with its key obstacles to affordability not coming down anytime soon. But what about investing in real estate investment trusts that specialize in mortgages?
The Bottom Line: The investor’s bottom line.
Here’s the YTD performance of the top five most searched mortgage REITs in The Juice’s proprietary Trackstar database.
Source: Google Finance
Mortgage REITs own mortgages and mortgage-backed securities. Similar to banks, mortgage REITs profit from net interest income – the difference between the interest income they collect on their investments and their costs. With interest rates rising across the board, mortgage REITs tend to perform poorly. Generally speaking.
One exception, as evidenced by Starwood Property’s (STWD) relative out-performance. REITs, such as Starwood, that deal primarily in commercial, not residential mortgages. These REITs borrow at fixed rates and lend at floating rates, making for a more favorable scenario.
This doesn’t necessarily make commercial mortgage REITs a buy. It just makes them comparatively less risky in the broad category. Later this month, The Juice will consider investments, particularly REITs, that actually benefit in the current environment.
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