It's hard to find a silver lining in the housing market these days.
Mortgage rates have soared to 23-year highs, topping 8% for 30-year fixed across much of the country. That's led monthly payments to soar, pushing many prospective homebuyers out of the market. Meanwhile, current homeowners, who are paying an average mortgage rate under 4%, are reluctant to sell their homes and take on much higher rates to buy new ones.
As a result, housing inventory for sale is unusually low. This has pressured much of the real estate industry, including real estate brokerages and agents, mortgage originators, and even the broader home improvement and home furnishings industry, as sales of new fixtures and furniture are associated with move-ins.
The state of the housing market now is certainly frustrating to a number of Americans, especially prospective homebuyers. However, while you can't control the either housing market or mortgage rates, you can capitalize on this environment in some other ways. Here are a few ways you can benefit from the current challenging conditions in the housing market.
Image sources: Getty Images.
Buy homebuilder stocks
There have been a lot of losers in this tight real estate market, but at least one category of companies has been a big winner: homebuilders.
As rates have spiked, buyers have bowed out, and owners have been reluctant to sell and lose their established low mortgage rates. As the pool of existing homes for sale has shrunk, demand for new homes has risen, which has sent homebuilder stocks soaring.
The chart below shows how the SPDR S&P Homebuilders ETF (NYSEMKT: XHB) and homebuilders Lennar (NYSE: LEN), D.R. Horton (NYSE: DHI), and NVR (NYSE: NVR) have performed over the last year.
While homebuilder stocks have put up strong gains over the last year, they have pulled back over the last couple of months as some investors have taken profits. However, these companies still have the potential for further growth, especially if housing inventory remains constrained.
D.R. Horton, for example, still trades at a price-to-earnings ratio of 7.6, and earnings are expected to remain strong at least through next year. In its most recent quarter, orders rose 37% and revenue increased 11%, though profits fell as costs rose.
If you're a prospective homebuyer waiting for mortgage rates to fall, owning homebuilder stocks can be a good hedge if mortgage rates remain elevated.
Buy mortgage REITs
Mortgage real estate investment trusts (REITs) are different from equity REITs. Rather than investing in properties, they hold mortgages, so they function as more of a financial sector investment than a real estate company.
Because mREITs make their money based on their net interest margin -- i.e., the difference between their costs of capital and what they earn on mortgages -- they generally do well in a higher-interest-rate environment.
AGNC Investment (NASDAQ: AGNC) is one example. The mREIT currently trades at a price-to-earnings ratio of less than 4 and offers a dividend yield of 16%.
If you believe that interest rates are going to remain elevated, mREITs seem like a good type of business to invest in.
As AGNC CEO Peter Federico explained in the mREIT's Q2 earnings release: "Over the last two years, the U.S. Treasury and Agency MBS markets have undergone a dramatic repricing as the Federal Reserve pivoted from an ultra-accommodative monetary policy in response to the pandemic's impact on the U.S. economy to its restrictive stance today to combat elevated inflation."
Buy U.S. Treasuries
Finally, the easiest way to take advantage of the current high-interest-rate environment is to buy U.S. Treasury bonds.
Yields on 10-year Treasuries are now at 4.8%, their highest level in 16 years, meaning investors can lock in 4.8% annual returns for the next 10 years, and if interest rates fall, the price of the bond will go up, adding to your returns. The yield on a 2-year Treasury note, meanwhile, is hovering at around 5%.
Investors who are comfortable earning variable-rate interest can look to a high-yield savings account from a bank, brokerage, or credit union, which could earn you 5% or more as you wait for the housing market to normalize.
The fate of the housing market may be out of your control, but if you're a prospective homebuyer, you can still build up the amount you'll have available for your down payment by putting funds into some of the investments above, which will make you even better prepared to buy when mortgage rates come back down.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lennar and NVR. The Motley Fool has a disclosure policy.
