The U.S. Housing Market's Slow Reset: A Strategic Opportunity in Sun Belt Real Estate and Mortgage-Backed Securities

The U.S. housing market is undergoing a recalibration, driven by shifting migration patterns, oversupply dynamics, and evolving affordability metrics. While the Sun Belt has long been a magnet for domestic migration and economic growth, recent data suggests a critical inflection point: markets that were once overheated are now cooling, creating a unique window for investors to capitalize on undervalued assets and mortgage-backed securities (MBS) tied to these regions.

The Sun Belt's Oversupply and Affordability Shift

The Sun Belt's dominance in housing sales volume is undeniable. In 2024, the region accounted for 25,857 weekly home sales-nearly six times the Northeast's 4,452-despite a starkly lower absorption rate of 7.3%. This paradox reflects a market oversaturated with inventory. For example, Austin, Texas, added over 76,000 for-sale housing units by fall 2024, while Dallas and Phoenix saw similar surges according to housing data. Sellers, now facing prolonged listing times and buyer resistance to premium pricing, have increasingly resorted to price cuts. Median home prices in the Sun Belt stand at $224,956, with homes spending an average of 72 days on the market-50% longer than in the Northeast according to market analysis.

This cooling trend is compounded by a slowdown in domestic migration. Net domestic migration to the South fell by 38% in the year ending mid-2024 compared to the first pandemic year according to migration data. While population growth remains robust in mid-sized Sun Belt cities like Nashville and Atlanta, the broader region's momentum has waned. Yet, affordability metrics are improving. The Sun Belt's price-to-income ratio stands at 22.7%, significantly lower than the West's 33.3% according to affordability data. This creates a compelling backdrop for investors seeking value in markets where fundamentals-low taxes, job growth, and a favorable business climate-remain intact according to market reports.

Mortgage-Backed Securities: Navigating Risk and Reward

Non-agency RMBS issuance hit a record $20.9 billion in Q3 2025, signaling investor confidence in structured credit opportunities according to issuance data. However, default rates for non-QM RMBS in the Sun Belt rose to 5.65% for loans 30 days or more past due in Q3 2025, up 33 basis points from the same period in 2024 according to credit data. This uptick, while modest, underscores the need for granular due diligence.

Cities like Phoenix and Atlanta offer instructive case studies. Phoenix absorbed 8,000 multifamily units in 2023, driven by 1.4% annual population growth and affordability according to market analysis. Yet, its housing market faces inventory pressures from pandemic-era construction surges, leading to stagnant price appreciation. Atlanta, meanwhile, absorbed 65,000 new residents in 2023 and achieved 4.7% rent growth in 2024, but its demand-to-starts ratio of 4.6 in 2025 highlights a supply-demand imbalance according to housing data. For MBS investors, these dynamics suggest that while Sun Belt markets remain attractive, returns will vary significantly by sub-market and loan type.

Strategic Entry Points for Investors

The Sun Belt's current environment presents three key opportunities:
1. Undervalued Housing Markets: Cities like Austin and Dallas, where price declines of up to 6.2% have been recorded, offer entry points for long-term investors. The median home price of $224,956, combined with 3.5 months of inventory, suggests a market primed for stabilization according to market analysis.
2. MBS Diversification: Non-agency RMBS in Sun Belt markets, particularly those with strong credit enhancement, offer yields that outpace traditional fixed-income assets. For instance, JPMorgan Chase and Deutsche Bank have increased CMBS activity in Phoenix and Atlanta, reflecting confidence in the region's long-term fundamentals according to institutional data.
3. Affordability-Driven Demand: As mortgage rates decline and the NAR's Housing Affordability Index rises to 104.5 in September 2025 according to affordability data, first-time buyers and investors are increasingly entering the market. This trend is most pronounced in mid-sized Sun Belt cities, where job growth and tax incentives offset affordability challenges according to market analysis.

Risks and Mitigation

Investors must remain cautious. Rising insurance costs in Florida, infrastructure strain in rapidly growing cities, and potential rate hikes could exacerbate Sun Belt market volatility according to risk analysis. However, these risks are mitigated by the region's structural advantages: a young, growing labor force, low tax burdens, and a business-friendly environment. For MBS investors, prioritizing loans in cities with strong absorption rates (e.g., Atlanta) and avoiding overbuilt markets (e.g., Phoenix) will be critical.

Conclusion

The U.S. housing market's slow reset is not a collapse but a recalibration. The Sun Belt, with its mix of oversupply, affordability gains, and structural strengths, represents a strategic opportunity for investors willing to navigate short-term volatility. By focusing on undervalued markets and MBS tied to cities with resilient fundamentals, investors can position themselves to capitalize on the region's long-term growth trajectory.