3 Reasons Not to Buy Rent-Backed Bonds Right Now

The sale of rent-backed bonds is impacted by the housing slowdown.

Rent-backed bonds have been popular the past two years as the national median rent has hit an all-time high this past summer. Rent-backed bonds are a type of investment vehicle that gets its money from rental payments. That means that if you invest in a rent-backed bond, you will receive regular payments from the renters who are living in the property that is being financed by the bond.

High housing costs, rising mortgage rates, and a lack of housing supply benefited the rent-backed bond sector, as many people were forced to rent. With the stock market's rocky year, it can be tempting to look for places to put your money that seem safe and secure, like rent-backed bonds. However, rent-backed bonds are not a good option right now. Here's why.

1. The housing market is slowing down

So far this year, $12 billion worth of rent-backed bonds were sold. However, new data shows that sales will fall to just $2 billion for the rest of the year. The rise in home prices has slowed down considerably, with some areas experiencing price declines. The slowdown is due to many potential home buyers being priced out of the market. Plus, mortgage interest rates have more than doubled since the beginning of the year. A monthly mortgage payment for a $500,000 home is $1,000 more now than it was in January.

As a result of the housing market slowdown, many bond issuers are putting their expansion plans on hold. Home Partners of America, the single-family landlord owned by Blackstone, recently announced that they would stop buying homes in 38 cities.

2. Rents are starting to decrease

While it's true that rents have been rising in recent years, the trend is now beginning to reverse. The national rent index fell in September, marking the first time this year the rents have declined month-over-month. If rents continue to fall, the value of rent-backed bonds will decline as well. This makes them a risky investment right now.

3. Rent-backed bonds are a relatively new investment

Rent-backed bonds are still a relatively new investment product. Blackstone, the largest investor in single-family rental homes, introduced rent-backed bonds in 2013, as a new security backed by those homes. Since then, many other financial institutions have followed suit. This means that there is less historical data to go on when predicting how they will perform in times of economic turmoil.

While rent-backed bonds may look like a tempting investment due to the housing boom the past two years, there are now several reasons to think twice before buying them. All in all, rent-backed bonds are risky right now due to the current economic conditions. With a potential recession on the horizon, there are safer alternatives like I Bonds that are returning close to 10% and are backed by the U.S. government.