Navigating the Housing Decline: Opportunities in Mortgage-Backed Securities Amid Construction Sector Risks

The U.S. housing market is at a pivotal crossroads. Recent data reveals a 1.7% year-over-year decline in housing starts for April 2025, driven by a 14.2% drop in single-family construction and regional imbalances. While multi-family starts surged temporarily, the broader trend underscores a sector in flux. For investors, this presents a critical juncture: avoid overexposure to construction equities and instead seek undervalued opportunities in mortgage-backed securities (MBS). The decline in housing starts, compounded by rising interest rates and policy uncertainties, demands a strategic repositioning of portfolios.

The Housing Downturn: Causes and Consequences

The slowdown is not merely cyclical but structural. Key drivers include:

1. Elevated Mortgage Rates: The 30-year fixed-rate mortgage averaged 6.8% in April 2025, with forecasts suggesting further increases to 7.85% by mid-2026. This has stifled affordability, particularly in high-cost regions like the West and South, where starts fell sharply.
2. Cost Pressures on Builders: Tariffs and inflation have pushed building material costs 6.3% higher, adding $10,900 per home to construction expenses. Builders, already grappling with labor shortages and land constraints, have cut prices by 5% to remain competitive.
3. Consumer Sentiment Collapse: The University of Michigan’s consumer sentiment index plummeted to 50.8 in April, its lowest since 1952, reflecting fears of unemployment and economic instability.

These factors have eroded demand for new construction, particularly in the Sunbelt, where overbuilding and affordability barriers have stifled growth. The Northeast and Midwest, however, remain resilient due to constrained inventory and steady demand, highlighting regional divergence.

Construction Equities: A Risky Bet

The construction sector faces mounting headwinds.

• Declining Profits: Homebuilders like D.R. Horton report a “slower-than-expected spring selling season”, with oversupply and weak pricing power compressing margins.
• Economic Uncertainty: Federal tariffs and fiscal policies have introduced volatility, delaying investment decisions. The National Association of Home Builders’ sentiment index fell to 40 in April, its lowest in years.

This divergence is stark. While construction stocks struggle, MBS, backed by existing mortgages, offer stability.

Mortgage-Backed Securities: A Shelter in the Storm

MBS are undervalued relative to construction equities for three reasons:

1. Interest Rate Resilience: Existing mortgages issued at lower rates (pre-2023) provide a steady income stream, insulated from rising rates.
2. Structural Demand: Even as new construction slows, 60% of U.S. households own homes, ensuring ongoing demand for mortgages.
3. Diversification Benefits: MBS correlate less with equities, offering portfolio stability during market turbulence.

Portfolio Adjustments: Act Now

Investors should:

1. Reduce Exposure to Construction Equities: Sell overleveraged builders and avoid ETFs tied to construction stocks (e.g., ITB).
2. Increase MBS Holdings: Target ETFs like MBG (iShares Mortgage-Backed Securities ETF) or VMBS (Vanguard Mortgage-Backed Securities ETF).
3. Monitor Rate Dynamics: Track the 10-year Treasury yield and mortgage rate spreads. A dip below 7% could unlock refinancing opportunities.

Conclusion: Seize the Window

The housing decline is not an end but a transition. While construction equities face prolonged headwinds, MBS offer a refuge in a volatile market. Investors who pivot swiftly to MBS and away from overexposed builders will position themselves to capitalize on the next cycle. The time to act is now—before the tide turns.

This analysis synthesizes data from the U.S. Census Bureau, TD Economics, and Forisk’s Housing Outlook. Always consult a financial advisor before making investment decisions.