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Wrong time to get into the housing market? · UBS Trending

• 0:00
  The housing market continues
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  to make headlines,
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  from rising interest rates to shifting supply and demand.
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  What are the numbers really show?
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  And what should investors watch for next?
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  We're going to break it all down for you in a whole
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  lot more right now.
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  On UBS trending.
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  Hey everybody and welcome to UBS training.
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  I'm Anthony Pastore.
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  So excited to be with you all and excited to talk about the topic
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  for today's show,
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  which is something that many of you
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  I know are interested
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  in, which is housing
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  and of course, all the related stories around housing.
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  And here to talk about
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  that is Clayton Trigg, head
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  of portfolio management from Angel Oak Capital.
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  Clayton, thanks for coming.
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  Welcome back.
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  Really good to see you.
• 0:47
  Yeah, Anthony, great to see you as well. Yeah.
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  Before we start,
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  I will say that this doesn't come out of nowhere.
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  We were talking about you coming through to talk about housing,
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  and we just recently got a survey that we send out quarterly
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  to our clients at UBS with a lot of people responding
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  and under life events, the top four, three of the top
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  four are related
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  to housing or real estate
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  buying, selling, remodeling their homes.
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  So clearly it's a topic that is of interest to a lot of people.
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  But the question then becomes, okay, so where are we right now?
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  We know rates are 30 year, mortgage rates specifically
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  are down from their highs, but still above that 6%
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  level supply looks like it's limited in parts of the country.
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  What are you seeing when you're looking at the US housing market?
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  Yeah, sure.
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  Overall, you know we've seen that
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  housing in general is finding its new equilibrium, right.
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  You had a huge increase in home prices in 2021
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  when mortgage rates were extremely low
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  and the economy was doing extremely well.
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  And then the fed, you know, raised rates in 2022.
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  And the fear was,
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  are we going to see a large decrease
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  in home prices like oh eight.
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  You know, we have
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  we have found in the markets
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  found its footing that
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  you're not seeing that large decrease in home prices.
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  We're seeing a disinflation in home prices.
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  So, home prices were up over 20% in 21.
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  And then in the last couple years you've seen home
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  prices go from like a 5% annualized rate to actually about
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  1 to 2%,
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  year over year.
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  What's interesting is inflation's above that right.
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  Inflation's in that 2 to 3% range.
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  So home prices are still going up.
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  They're just going up at a level below inflation.
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  So that's actually making the housing market generally
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  get more back into the right
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  equilibrium needs between supply and demand. Right.
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  But I mean
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  the people keep talking about affordability of housing.
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  And it's interesting
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  when you talk about prices,
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  but still affordable affordability seems to be a bit of an issue.
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  And I mean, I imagine
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  that's kind of really related to where rates are right now.
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  Talk about the affordability side of this housing market,
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  because that seems to be
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  where most people are kind
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  of throwing their hands up and saying,
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  I'm not sure what to do now,
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  especially if you're a first time homebuyer.
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  You're young, you're like, I don't know if I can afford this.
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  Yeah, absolutely.
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  That has been the number one question we get from clients
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  last few years at home.
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  Prices have gone up so much and mortgage rates went up.
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  Right.
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  It's kind of a
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  it was kind of a double
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  whammy for someone looking to buy a home,
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  especially the first time homebuyer, some in their 20s and 30s.
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  You've actually seen the average age of first time homebuyers,
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  you know, and go up about five years, the last,
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  the last 5 or 7 years. Right.
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  Thinking about where
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  affordability is going, though,
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  we've actually seen a sharp improvement in affordability.
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  And the way we measure
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  that is just looking at the median home price,
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  the median income and today's current 30 year mortgage rate.
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  And you calculate the monthly payment, right.
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  Everyone thinks about their monthly payment
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  if they buy a new home today
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  or they do a refinance, and that monthly payment,
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  is really been improving
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  because home prices have been going down.
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  At least they haven't have been disinflation. Right?
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  So instead of inflation, it's been coming down.
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  It's been this inflating.
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  And then mortgage rates, you know they moved a lot higher.
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  But they're not near 7%.
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  They're a little stubborn above six.
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  But they're moving closer to 6%.
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  So what's really interesting is
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  you know, this year if we get another year or two of home prices
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  being kind of sideways,
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  you're actually going to be back
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  at the 40 year average of affordability,
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  which means the monthly payment
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  as a percentage of income is at its 40 year average.
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  So not the levels that we saw a couple years ago, but also we're
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  not in an area where housing is extremely cheap, like it was.
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  You kind of in that 2014 to 2018 era when home prices, you know,
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  really hadn't climbed back from the previous peak. Yeah.
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  And those of us I mean, I consider myself in that US category
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  because I refinanced my mortgage around 2016
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  and, you know, sitting around a 3%.
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  And there are a number of folks in the US as homeowners,
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  about 20% of them are at that 3% level.
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  But we were just talking about this.
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  Interestingly, for the first time since rates have really spiked,
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  those that are above 6% are at around 21%.
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  So they're starting to surpass
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  those who we say have those golden handcuffs
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  and are holding on to their homes
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  because their mortgage rates are so low.
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  It's really interesting to see that shift.
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  And, you know, we here at CIO do think that obviously monthly
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  payments as a share of income are near,
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  you know, multi-decade highs.
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  But as you're saying, that seems to be shifting
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  to an interesting phenomenon
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  that we're watching with housing in the US
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  compared to where we were in 2008 and even 2020, 2021.
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  Yeah, absolutely.
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  You know, speaking to the refi about the refi wave in 2020
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  and 2021, about half of America refi their mortgage.
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  So the average mortgage rate in the US is still around 4%.
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  Right? Right.
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  So not if you get a new mortgage today,
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  but the outstanding rates around 4% versus
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  you get a new mortgage today.
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  It's typically between about six and 6.5%.
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  That's still a historically wide gap,
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  which is why a turnover in the housing market is very low.
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  But that's healthy, right?
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  That's the equilibrium
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  that we think we should be in
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  is you have low turnover in the housing market.
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  Home prices are coming back to come back to normal,
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  but just not going up as much as they were before.
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  And mortgage rates are coming down overall.
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  So yeah, that's moving affordability into the right spot.
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  And to your point
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  yeah, you're seeing a larger percentage of mortgages
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  that are above 6%.
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  That's only going to continue to grow.
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  As you know, mortgages are being created today.
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  You know or created above six.
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  They're not created a two and a half anymore unfortunately.
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  Right, right. Exactly. That's the difference.
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  And also, you know,
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  the our chief investment office
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  does think that the fed is still going to cut rates
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  towards the back half of this year, likely September
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  December meetings, probably 25 basis points each.
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  So there may be it's not always a direct correlation,
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  but there may be a little bit of relief
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  within the 30 year mortgage rate.
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  If the fed does cut that of IFS.
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  You know, with all the uncertainty now with the Middle East
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  and what's going on in the Iran conflict,
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  there's so much that the fed is trying to digest,
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  looking at obviously housing, looking at jobs,
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  and looking at inflation, of course, which we know spiked
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  recently because of the sort of quick increase in oil prices.
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  But back to housing, if you look at mortgage credit quality.
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  So from the investment case,
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  and especially loan performance, what, what
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  what is the data showing you
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  when you look at all of that information.
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  Yeah.
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  So a few key indicators,
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  you know,
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  delinquencies are still effectively at near an all time low.
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  So people that are
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  individuals are late in their mortgage is near an all time low,
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  which is what we expected.
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  You've really not seen credit extension or lending standards get,
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  you know, get much wider,
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  which has been unfortunate for some people trying to buy a home.
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  But in general, from an investor perspective,
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  the credit box still remains very, very tight as underwriting
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  standards are tight.
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  So that's kept delinquencies low
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  even as we've seen some of the volatility.
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  To your point,
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  overall, geopolitically,
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  we've seen a gradual rise in the unemployment
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  rate from the mid threes to the low fours,
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  and delinquencies are still under control in the housing market.
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  That's good for us. I mean, good for bondholders.
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  Also what's the the primary factor that we look at thinking
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  about the health of the market
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  and being a debt investor is the loan to value.
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  So how much is how much outstanding in the market?
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  What's a loan to value ratio.
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  And one of the key indicators is loan to
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  value is really had not gotten on new mortgages
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  and not gotten to that 9000 level like we saw in housing 6007.
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  Right.
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  Which led to, you know, over leverage and the US housing market,
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  they've stayed under control.
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  So we've seen now record increases in home equity.
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  Right.
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  You're about 35 trillion in U.S home equity.
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  That's leading
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  to a lot of opportunities
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  for borrowers to take money out of their home to do a remodel.
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  Right. And still keep they're still keep their first lien.
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  So that record level of housing,
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  a record level of equity in the housing market
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  is going to be really fascinating.
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  On how that eventually filters through to consumers,
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  but it is a positive backdrop for consumers and for the U.S.
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  homeowner.
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  Yeah, I'm
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  glad you brought up about the low delinquencies,
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  because that really was the catalyst
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  or a part of the catalyst
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  that led us to the great financial crisis in 2009,
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  because we're always asking the question,
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  is this a repeat of that?
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  And with the data that you're seeing and show and talking about,
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  clearly the answer is no.
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  We also at CIO don't think that housing is in a bubble,
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  just, you know, or at risk of a 2008 style crash.
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  But we're not necessarily pounding the table on housing,
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  but saying it's an opportunity, but,
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  you know, there are still just be cautious.
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  And even with.
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  So I'm going to ask you about this too,
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  with mortgage backed securities.
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  We have an attractive USC here, Leslie Falconio,
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  who sits here with me, and it talks about that.
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  What are your views on the investing side?
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  Where are the opportunities?
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  Obviously you're a bond shop, so you're talking
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  probably things like mortgage backed securities
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  and other fixed income products.
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  Where would you recommend investors be looking
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  given what you just described?
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  The overall housing market is like right now. Sure.
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  So we would completely agree with
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  with Wesley in the CIO office
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  that agency mortgages have been a very attractive asset to own.
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  You know, last year actually, there was a large headline around.
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  It was one of the best years for agency mortgage performance,
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  you know, up almost 9%, especially in decades.
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  So, Leslie's being completely right.
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  The agency mortgages have been attractive area,
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  to invest in for fixed income investors
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  where we think that value is today is we still agree.
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  We still think agency mortgages look attractive,
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  especially after spreads.
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  Got a little bit cheaper in March,
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  following the global, you know, geopolitical, geopolitical short.
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  Concerns. Yeah.
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  So they actually cheapened up again.
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  So we actually have a more favorable view
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  for agency mortgage spreads going forward,
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  for the rest of the year.
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  One really interesting
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  area, the market
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  outside of agency mortgages is actually non agency mortgages.
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  These are bonds that are also backed by U.S housing.
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  But they don't have the Fannie and Freddie and Jenny guarantee.
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  So you know as investors
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  we have to analyze the credit risk of those underlying borrowers.
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  Since Fannie and Freddie is not guaranteeing them
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  those,
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  opportunities and yields are at a much higher level
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  than the corporate space.
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  So we're actually seeing higher yields, higher spreads in non
• 10:01
  agency mortgages,
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  you know, from triple AA not agency mortgage bonds to single B
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  that are at higher yields than corporate credit.
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  This is really notable
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  because if you go back to the pre financial crisis era the triple
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  A mortgage bonds are actually trading
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  at lower yields than corporate bonds for the same rating. Right.
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  So we see that is a big opportunity for investors.
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  And so agency look it looks attractive.
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  But under the hood
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  some of these tackle areas and investors
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  can look at non agency mortgages
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  actually look even more attractive in our view. Right.
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  And just really quickly before we wrap up Clayton
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  if if the fed does cut rates which we expect they will,
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  is that a potential risk to mortgage backed securities
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  or any other kind of fixed income instruments
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  that you're liking right now.
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  So we do think active management
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  and the mortgage backed securities
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  market is extremely important,
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  because if the fed cuts rates and mortgage rates move lower,
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  you know,
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  some of these new mortgages
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  that were created a couple of years ago at six and a half, 7%,
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  they're at risk of refi, right.
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  But there is a significant portion of mortgage backed securities
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  that are at lower coupons, right.
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  Borrowers that took out rates at three and 4% in 2021.
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  Those are trading at big discounts to par.
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  So if investors can source those,
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  look for funds that are looking for those opportunities,
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  they can actually have, a bond that actually improves in value
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  when the fed cuts rates
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  because you have a better convexity profile effectively. Right.
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  So we think that discount of mortgage bonds
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  look really attractive in a fed cutting environment. Excellent.
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  And again back to that FHA data three 4 or 5% loans.
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  They make up around 60 to 70% of mortgages
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  that are being carried today. So yeah, it's a significant number.
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  Exactly. It's a very large market.
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  Huge opportunity. Right Clayton. Thank you I love sitting here.
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  This is obviously it's an important topic
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  that people are really interested
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  in, as evidenced by the fact that we got you here today
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  and you wanted to talk about this and our survey.
• 11:39
  So good stuff. Great to have you here.
• 11:40
  Thanks, Anthony. Great to see you again.
• 11:41
  Come back again soon.
• 11:42
  Good to see you, Clayton.
• 11:43
  Trick again from Angel capital,
• 11:45
  head of portfolio management at Angel capital.
• 11:47
  And thank you all for joining us for this episode.
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  There's lots more information
• 11:50
  on our insights website at ubs.com/views.
• 11:53
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• 11:55
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• 11:57
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• 12:00
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• 12:02
  Lots of content there for you.
• 12:04
  And as always,
• 12:05
  if you do have any questions
• 12:06
  or want to continue this conversation,
• 12:07
  make sure you're doing so with your financial advisor
• 12:10
  until next time, I'm Anthony Katz.
• 12:11
  Have a great rest of your day
• 12:13
  and remember to keep your eyes on what's trending.
• 12:15
  We'll see you soon, everybody. Thanks.