What happened
Shares of several real estate stocks and mortgage real estate investment trusts (REITs) struggled today as mortgage rates soared.
Shares of the real estate brokerage Redfin (RDFN +0.00%) traded close to 7% lower as of 11:50 a.m. ET today. Meanwhile, shares of mortgage REITs AGNC Investment (AGNC 0.32%) and Annaly Capital Management (NLY 0.46%) traded more than 5% and nearly 10% lower, respectively.
So what
Mortgage rates just keep pushing higher. The yield on the 30-year fixed mortgage zoomed to 6.7%, up more than 40 basis points from last week (basis point = 0.01%), and is now the highest it's been since July 2007. The sudden spike due to market volatility and uncertainty has started to choke off homebuyer demand.
Image source: Getty Images.
"There has been a significant change in homebuyer sentiment, especially with what rates have done in recent weeks," Jason Sharon of Home Loans Inc. told Yahoo Money. "I've had 10 people in the last 10 days effectively decide that because of the change in rates, they're withdrawing from the home shopping for a bit. Most of them were repeat buyers."
The news doesn't bode well for Redfin, which has a business built on home transactions. Home prices are also starting to fall, another bad sign for the company.
AGNC and Annaly Capital are mortgage REITs, meaning they are companies that invest largely in mortgage assets and mortgage-backed securities. As REITs, they also pay out at least 90% of their taxable income in dividends.
Rapidly rising rates can be difficult for mortgage REITs because these companies are typically borrowing money short and lending or investing long. But as interest rates rise, the cost of funding and borrowing short grows as well. This would normally be OK because mortgage rates and yields are paying more as well. However, rates have risen so quickly that the yield curve is now inverted, meaning shorter-term rates are now higher than long-term rates.
NYSE: NLY
Key Data Points
This has caused all sorts of chaos in mortgage REITs' varying business models, and the Federal Reserve's hawkish comments and projections following its September meeting have not helped the matter.
The median forecast from members of the Fed is that the federal funds rate will end the year at 4.4%, which implies another jumbo 0.75% rate hike and also a half-point hike before the year is over. This means that there could be lots more volatility ahead, which could cause more problems for mortgage REITs.
Now what
Each of these three stocks has been hammered this year, none more than Redfin, which is down a whopping 85%. But the slowdown in housing sales and fall in home prices does not bode well for the company.
AGNC and Annaly both have huge dividend yields right now, with AGNC paying 16.7% and Annaly now at more than 20%. While these yields are super attractive, there is still a lot of risk in the environment, with the Fed planning more rate hikes and mortgage rates zooming higher.
If the Fed is able to soon slow its rate hikes, that may help things stabilize, which could make mortgage REITs attractive. I'll continue to watch how the environment progresses but don't think I'm ready to buy right now.
