The housing market and all the uncertainty that afflicts it is undoubtedly on the minds of potential buyers, sellers and investors.
As the Federal Reserve continues to try to rein in inflation with rate hikes, it has indirectly driven up the cost of the home loan that 90% of buyers get – the 30-year fixed rate mortgage. The average 30-year fixed-rate mortgage in the United States climbed to 6.82% as of September 29, more than double what it was on September 30, 2021, when the average rate was 3.01% .
As a result, a growing affordability crisis is plaguing potential buyers, as the average monthly payment has increased by more than 50% since last year. This month, mortgage interest rates hit a high not seen since the housing crash of 2008.
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Due to rising rates and house prices and still historically high listings, the market is starting to see a drop in demand and an increase in supply.
According to the National Association of Realtors, “Existing sales fell for the sixth consecutive month in July. Sales fell 5.9% from June and 20.2% from a year ago. »
According to Realtor.com, “The supply of homes for sale is growing, up 27% in early September compared to the same period a year ago.”
As housing prices and home values hit all-time highs last year, historically low interest rates have kept homebuyers able to afford purchases. Now the market is seeing a price correction as house prices and values are still near highs, while rates have driven monthly payments increasingly unaffordable. Additionally, more and more potential sellers are deciding to stay put as they see an increase in supply and a decrease in demand. They understand that if they want to get a mortgage to buy a new home, they will see an interest rate almost twice as high if they had refinanced in 2020 or 2021.
Investments in real estate debt
Investing in real estate-backed mortgages could offer a portfolio hedging strategy. Investing in debt, compared to equity, is safer for investors because physical property is held as collateral. When you invest in home equity debt, you are effectively lending money to a borrower who, in most cases, will rehabilitate the home or make improvements and sell the property.
Related: Investments in real estate debt offer relief with returns of 8% to 12%
Rather than buying a property yourself and paying a higher interest rate to finance it, investing in debt allows investors to benefit from higher interest rates. Lending at higher rates equates to higher returns for the lender.
While it’s true that investing in debt versus equity offers a lower potential return ceiling, in times of market uncertainty you can still enjoy high returns with the added benefit of security.
The holding period is much shorter for investing in debt than for buying property that you have to own before you see a return. The holding period on some leveraged investment platforms can be as short as six and 24 months compared to equity trading, which is typically five to 10 years.
If the borrower defaults on the loan, bond investors can recover some or all of their investment through a real estate auction. With a stock investment, however, they will likely see their capital disappear.
Investing in mortgage debt is a way to feel more secure as house prices correct. With home-backed loans, investors gain predictability in terms of the amount and frequency of returns, in addition to the security of a property-backed investment.
Graphic: Courtesy of Redfin