Navigating the Crosscurrents: Housing Affordability and Mortgage Rate Risks Under the "One Big Beautiful Bill"

The "One Big Beautiful Bill" (OB3), a sweeping piece of legislation signed into law in 2025, promises to reshape U.S. housing markets and fiscal policy for years to come. For real estate investors, the bill presents a dual-edged opportunity: expanded tax incentives for affordable housing could boost supply, while its fiscal consequences may elevate mortgage rates, compressing margins for homebuilders and mortgage-backed securities (MBS). This article explores how these crosscurrents will define investment strategies in the coming years.

The LIHTC Boost: A Tailwind for Affordable Housing Supply

The OB3's most direct housing impact lies in its expansion of the Low-Income Housing Tax Credit (LIHTC). By extending and increasing LIHTC allocations through 2029, the bill aims to finance an estimated 527,700 additional affordable rental homes by 2035. This provision relaxes the requirement for developers to use government-issued bonds, lowering costs and accelerating projects.

For investors, this creates opportunities in multifamily and affordable housing sectors. REITs focused on LIHTC-driven projects, such as Enterprise Community Investment or Apartment Investment and Management (AIV), could benefit from increased demand for stabilized, rent-regulated units. Additionally, states and municipalities may issue more housing bonds to complement federal incentives, creating demand for municipal bonds tied to affordable housing development.

The Fiscal Elephant in the Room: Deficits and Mortgage Rates

However, the bill's broader fiscal implications pose significant risks. The Congressional Budget Office estimates OB3 will add $2.4 trillion to the national debt over ten years, primarily due to tax cuts and extended spending. This deficit expansion could push up long-term interest rates as markets price in higher government borrowing costs.

Rising rates are a double-edged sword for real estate. While they may reduce refinancing activity (a headwind for mortgage servicers like Black Knight (BKI)), they directly threaten homebuyers. A shows a strong correlation: every 1% rise in Treasury yields lifts mortgage rates by approximately 0.8%. With the OB3's deficit likely to keep Treasury yields elevated, homebuilders like D.R. Horton (DHI) and Lennar (LEN) face weaker demand for new single-family homes.

Sector-Specific Risks and Opportunities

Opportunities:
1. Rent-Stabilized Assets: Apartments in markets with strict rent-control laws, such as New York City or California, are less sensitive to rate hikes. Equity Residential (EQR) and AvalonBay (AVB), which focus on stabilized urban markets, could outperform.
2. Short-Duration Real Estate Debt: Investors should prioritize adjustable-rate mortgages (ARMs) or short-term commercial paper tied to real estate. These instruments reduce exposure to rising long-term rates.

Risks:
1. Homebuilders: Margins will compress as higher mortgage rates reduce buyer affordability. Trailing stocks like KB Home (KBH) have already underperformed as rates rose in 2023–2024.
2. MBS Portfolios: A reveals that MBS underperform when rates rise. Duration-sensitive funds like iShares Mortgage Real Estate Capped ETF (REIT) may lag.

Investment Strategy: Navigating the Crosscurrents

Investors should adopt a hedged approach:
- Allocate to stabilized rental assets with long-term leases, which provide steady cash flows irrespective of rate fluctuations.
- Shorten debt durations: Consider floating-rate notes or real estate investment trusts (REITs) with short-term debt maturities.
- Avoid long-duration MBS: Their sensitivity to rate hikes makes them vulnerable to volatility.

The OB3's LIHTC provisions offer a clear path to growth in affordable housing, but the bill's fiscal recklessness introduces a wildcard—rising rates—that could destabilize parts of the market. By focusing on income-producing assets with rate insulation, investors can capitalize on the bill's benefits while mitigating its risks.

In a world where deficits and rates are intertwined, the mantra for real estate investors is clear: duration is the enemy, stability is the prize.