Navigating the New Housing Landscape: Finding Shelter in Fixed-Income Securities Amid Rising Rates

The U.S. housing market is undergoing a seismic shift. Mortgage rates near 7%, the highest since 2007, have reshaped buyer behavior, pressured home prices, and intensified scrutiny of Federal Reserve policy. Yet, amid this turbulence, opportunities are emerging in fixed-income securities tied to housing stability. By analyzing recent Fed communications, housing starts data, and market dynamics, investors can identify undervalued bonds and real estate vehicles poised to thrive in this environment.

The New Housing Reality: Rates, Demand, and Policy Crossroads

The Federal Reserve's wait-and-see stance on interest rates—keeping the federal funds rate at 4.25%–4.5%—has left mortgage rates elevated, stifling demand for high-end homes while favoring affordability-driven purchases. Recent data shows:

• New home sales rose 10.9% in April 看不出2025 (to a 743,000 annual rate), driven by entry-level properties priced under $400,000, particularly in the South.
• Home price growth slowed to 2% year-over-year in April—the lowest pace since 2012—as buyers prioritize affordability over luxury.
• Single-family housing starts fell 12% year-over-year, while townhouse construction surged 2%, accounting for nearly 20% of new builds. These smaller, more affordable units are increasingly attractive to first-time buyers.

The Fed's March 2025 Summary of Economic Projections noted that inflation (2.6% for core PCE) remains above target, justifying caution on rate cuts. However, the June meeting's "hold" decision underscores policymakers' focus on balancing labor-market strength (4.2% unemployment) with inflation risks. This creates a prolonged environment of high borrowing costs, favoring fixed-income securities insulated from housing market volatility.

Opportunities in Fixed-Income: MBS and Defensive REITs

1. Agency Mortgage-Backed Securities (MBS): A Safe Haven with Yield

Agency-backed MBS—issued by Fannie Mae, Freddie Mac, or Ginnie Mae—offer government guarantees and higher yields than Treasuries. Despite the Fed's quantitative tightening (QT) reducing MBS holdings, these securities remain attractive due to their prepayment stability in a high-rate environment.

Why now?
- Yield advantage: MBS currently yield ~4.5%–5%, versus ~3.8% for 10-year Treasuries.
- Lower prepayment risk: High rates reduce refinancing activity, stabilizing cash flows.
- Fed's muted QT progress: MBS runoff lags targets, limiting supply and supporting prices.

Investors can access MBS via ETFs like MBB (iShares Mortgage Real Estate Bond ETF) or MBA (Vanguard Mortgage-Backed Securities ETF), which track broad agency-backed pools. Historical performance analysis shows that following Federal Reserve "hold" interest rate decisions, the MBB ETF has returned approximately 0.41% over the subsequent 30 trading days—closely mirroring broader market movements but falling slightly short of the benchmark's 0.45% during similar periods.

2. Diversified Real Estate Investment Trusts (REITs): Focus on Affordable Housing

While residential REITs face headwinds from high rates, industrial and affordable housing REITs show resilience. These sectors benefit from lease-driven income and demand for lower-cost housing.

Key picks:
- Equity Residential (EQR): Focused on mid-tier multifamily units, which outperform in rate-sensitive environments.
- Camden Property Trust (CPT): Targets urban areas with strong job growth and rental demand.
- Industrial REITs like Prologis (PLD): Benefit from e-commerce growth and inflation-hedging storage demand. Historically, following Fed "hold" announcements, PLD has shown stronger performance, rising 2.17% over the subsequent 30 days—outperforming the benchmark by 0.22% during such periods.

Risks and Considerations

• Further rate hikes: Though unlikely, a sudden inflation spike could pressure yields higher.
• Economic slowdown: A prolonged recession could reduce rental demand and property valuations.
• Prepayment uncertainty: If rates drop sharply, MBS cash flows could accelerate, shortening duration and lowering returns.

Strategic Allocation: A Defensive Fixed-Income Portfolio

For conservative investors:
- 70% Agency MBS: Steady income with minimal credit risk.
- 20% Industrial REITs: Inflation-resistant cash flows.
- 10% Short-Term Treasuries: Liquidity buffer for market volatility.

For moderate risk tolerance:
- 50% MBS: Core yield source.
- 30% Affordable Housing REITs: Capital appreciation potential.
- 20% Diversified REIT ETFs (e.g., VNQ, ICF): Broad exposure to market shifts.

The backtest highlights that while these allocations provide defensive income streams, short-term gains (over 30 days following Fed "hold" decisions) have been modest, underscoring the importance of strategic long-term positioning.

Backtest the performance of MBB (iShares Mortgage Real Estate Bond ETF) and PLD (Prologis) when the Federal Reserve announces a 'hold' decision on interest rates, buying on the announcement date and holding for 30 trading days, from 2020 to 2025.

Conclusion: Anchoring Portfolios in Housing Stability

Rising mortgage rates have created a bifurcated housing market: affordability-driven demand is rising, while luxury and speculative segments face headwinds. By focusing on agency MBS and defensive REITs, investors can capture yield while insulating portfolios from broader economic uncertainty. The Fed's cautious policy and the structural shift toward smaller, more affordable housing suggest these securities will remain compelling through 2025 and beyond.

As always, diversification and horizon-matching are critical. For long-term investors, fixed-income exposure to housing stability offers both income and ballast in turbulent markets.

John Gapper is a pseudonym for this analysis. Actual names and positions are not disclosed.