Thanks to an ultra-dovish Fed and risk-off trade sentiments amid the pandemic, mortgage rates dropped to another record low last week,
for the 13th time this year, per CNN. The average interest rate on a 30-year fixed-rate mortgage fell to 2.72%, according to Freddie Mac. That was the minimum level seen in the nearly 50 years of the mortgage giant's survey. The 15-year fixed-rate mortgage tumbled to 2.28%.
"Weaker consumer spending data, which accounts for the majority of economic growth, drove mortgage rates to a new record low," said Sam Khater, Freddie Mac's chief economist, as quoted on CNN. "While economic growth remains unstable, strong housing demand continues to have a domino effect on many other segments of the economy," the economist said.
Against this backdrop, two segments of the economy and the investing world should stand to gain/lose. Below we highlight those.
Homebuilding – Winner
The demand for housing has been robust this year. Sales of existing homes in October breezed past expectations, rising 4.3% from September and 26.6% annually. The median price of an existing home sold in October was $313,000, up 15.5% annually. That is the
highest median price on record. It shows higher demand for housing.
The coronavirus outbreak has made the work-from-home option a big hit. Companies now will likely be offering the option permanently with more ease. So many people will now continue to be moving to suburban areas to avoid high expenses involved in a dense and expensive city. Suburban areas offer more affordable homes. Along with low mortgage rates, this move-to-suburbs trend should also keep homebuying strong in the coming days.
“The surge in sales in recent months has now offset the spring market losses. With news that a
COVID-19 vaccine will soon be available, and with mortgage rates projected to hover around 3% in 2021, I expect the market’s growth to continue into 2021,” per the NAR’s chief economist, Lawrence Yun, as quoted on CNBC.
As a result,
iShares U.S. Home Construction ETF ( ITB Quick Quote ITB - Free Report) , SPDR S&P Homebuilders ETF ( XHB Quick Quote XHB - Free Report) and Hoya Capital Housing ETF ( HOMZ Quick Quote HOMZ - Free Report) have been winners in the segment (read: Tap Homebuilding ETFs on Upbeat Earnings & Vaccine Hopes). Mortgage-Based Securities – Likely Loser iShares MBS ETF may see suppressed gains in this kind of scenario. Low mortgage rates helped a MBS record number of homeowners to refinance. For mortgage-backed securities, mortgage holders tend to refinance their mortgages amid falling rate environment, which causes the security holder losing the level of future interest that a holder estimated before.
This is a negative for mortgage-backed securities investing.
Because the cash flows associated with such securities are uncertain, their yield-to-maturity cannot be predicted surely at the time of purchase. Notably, MBS offered total return (which marks changes to the NAV and accounts for distribution too) of 4.12% in the past one year while market price gains were 4.13% (as of Oct 31, 2020). In contrast, iShares 20+ Year Treasury Bond ETF ( TLT Quick Quote TLT - Free Report) offered a higher total return of 13.97% versus a market return of 13.44%. Want key ETF info delivered straight to your inbox?
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