In recent days the financial media has done quite a bit of reporting on the housing market. Unfortunately readers have come away with different interpretations of the data. This confusion is at least partially due to the different ways such information is compiled and reported. The questions we field are typically similar: Should I concentrate on month-over-month data or Year-over-year? What exactly is seasonality? Most importantly, how does this affect my investments?
There is a seasonal pattern to the U.S. housing market driven by weather. To simplify, more houses sell at higher prices in the spring and summer when potential buyers are most likely to attend open houses. This is especially true in the Midwest and Northeast where weather is most volatile. As a result home sellers prefer to market and sell their homes during the buying season.
Bill McBride at www.calculatedriskblog.com illustrates this pattern by tracking the growth of Existing Home Inventory listed during the spring months through the peak of inventory in the summer/autumn and decline in winter.
Mortgage bond pay downs follow a similar pattern. The months of April through October tend to provide the heaviest cash flow as the greatest number of properties are bought, sold and refinanced. This could be especially true in 2014 following a long and snowy winter.
Will our portfolio of loans receive faster prepayments during 2014’s buying season? Maybe.
Remember: our payments only accelerate when our specific loans pay down. And we cannot control the disposition of any individual loan. But we have positioned ourselves for accelerating payments by buying certain types of loans:
- All of our bonds were purchased at a discount. Investment returns will benefit from faster prepayments.
- Our continued focus on loans made prior to 2005 means that our portfolio is a year older and that the majority of our borrowers have been in their homes for at least 10-years.
- As mortgage rates have increased more borrowers are choosing to refinance with ARM loans. We believe the high quality borrowers we target will have better access to ARMs than newer borrowers – especially as credit standards tighten.
- With fewer borrowers refinancing the mortgage industry has developed excess capacity to refinance loans. We believe the industry will target our low LTV borrowers with refi offers as the pool of credit worthy applicants shrinks.
Clearly this is an exciting time of year for the housing market and investors. For our current investors, it is a great time to review your bond portfolio and the underlying loans that drive monthly cash flow. Please contact us to set up a review appointment.
This is also an excellent time to start building an MBS portfolio. We encourage you to email or call to learn how these real estate linked, cash flow driven investments can provide interesting returns – even in a rising interest rate environment.