Resilient Housing Demand Amid Rising Rates: Finding Value in Homebuilders and Mortgage REITs

The housing market has faced significant headwinds in 2025, with mortgage rates hovering near 7% and builder sentiment hitting decade lows. Yet, beneath the surface, opportunities emerge for investors willing to parse regional disparities, pricing strategies, and structural shifts in lending. This analysis identifies undervalued homebuilders and mortgage REITs poised to capitalize on sustained mortgage application growth, while cautioning against sectors overly exposed to rate-sensitive risks.

The Mortgage Rate Landscape: Stability Amid Volatility

Recent trends show mortgage rates stabilizing after prolonged volatility. The 30-year fixed rate for conforming loans dipped to 6.78% by mid-June—the lowest in over a month—driven by economic uncertainty and falling mortgage-backed securities yields.

While refinancing activity remains subdued, purchase applications have shown resilience. For instance, mortgage applications surged 12.5% post-Memorial Day as buyers capitalized on modest rate declines. However, the subsequent dip of 2.6% underscores lingering caution. The key takeaway: demand persists, but it's uneven and sensitive to rate movements.

Homebuilders: Navigating Soft Markets with Pricing Power and Regional Focus

Despite a National Association of Home Builders (NAHB) sentiment index of 32 in June—the lowest since 2020—select builders are adapting to the new reality through price cuts, incentives, and geographic focus.

Top Picks:
1. D.R. Horton (DHI): The industry leader retains scale and diversification, with 93,311 closings in 2024. Its foray into multifamily housing (ranked No. 5 in 2024) buffers against single-family headwinds.
2. NVR (NVR): A cash-rich operator with minimal debt and a $1.5 billion war chest. Its mortgage services subsidiary provides insights into buyer demand.
3. M.D.C. Holdings (MDC): Acquired by SH Residential, this affordable housing specialist benefits from steady demand in entry-level markets.

Regional Dynamics Matter:
- Northeast and Midwest: Tight inventory supports prices (+4.1% YoY in some areas). Builders like Toll Brothers thrive here.
- South and Sunbelt: Overbuilding has led to price declines of 7.5% in some markets. Avoid exposure to these regions unless valuations are deeply discounted.

Mortgage REITs: Floating Rates and Strategic Hedging Offer Income Stability

Mortgage REITs (mREITs) with floating-rate exposure are navigating the 6% rate environment through hedging, portfolio shifts, and operational control.

Standout Player: Chimera Investment Corporation (CIM):
- Strategy: Acquired Palisades Advisory Services to retain control over securitizations, reducing reliance on third-party servicers.
- Portfolio: 88% in non-Agency RMBS, which offer higher yields and embedded optionality to mitigate prepayment risks.
- Metrics: A 7.6% dividend yield, stable book value growth (7.4% in Q1 2025), and reduced leverage (3.9x).

Sector-Wide Trends:
- Leverage and Balance Sheets: Listed mREITs maintained 90.9% of debt at fixed rates, with 79.4% as unsecured debt. This stability supports dividends amid fluctuating rates.
- Risk Factors: Exposure to non-Agency RMBS hinges on housing stability. A Fed rate cut in 2025 could ease borrowing costs but also pressure spreads if yields drop.

Caution: Rate-Sensitive Sectors and Overbuilt Regions

Not all areas of the housing market are resilient.

1. Office and Retail Real Estate: Vacancy rates in office markets hit 20%, and lenders are tightening credit for cyclical sectors.
2. Overbuilt Regions: The South and Mountain West face inventory gluts, with some markets seeing prices drop 20% from peaks.
3. ARM Resets: Adjustable-rate mortgages (ARMs) resetting to higher rates could pressure borrowers, particularly in high-cost areas.

Investment Strategy: Target Resilience, Avoid Overextension

• Buyers:
• Homebuilders: Prioritize Northeast-focused names like Toll Brothers (TOL) and those with strong balance sheets like NVR.
• mREITs: Consider Chimera (CIM) for its hedging and dividend stability, and Annaly Capital (NLY) for its conservative approach.
• Avoid:
• Sunbelt-focused builders like PulteGroup (PHM) unless valuations hit rock bottom.
• REITs with heavy exposure to office or retail real estate.

Conclusion

The housing market's resilience in 2025 isn't uniform, but it's far from dead. Investors can find value in homebuilders with pricing discipline and regional focus, alongside mREITs leveraging floating rates and hedging. However, success requires avoiding overexposed sectors and regions. For income seekers, mREIT dividends offer stability, while homebuilders with defensive positions may rebound as rates stabilize.

Final Call:
- For income: Buy Chimera (CIM) for its 7.6% yield and securitization edge.
- For growth: Look to NVR and M.D.C. Holdings for affordability-driven demand.
- Stay clear: Office REITs and South-centric builders until valuations reflect the risks.

The housing market's next chapter hinges on rate trajectories and inventory corrections—investors must be selective to navigate the storm.