Rising Mortgage Costs and Housing Affordability: Navigating Investment Opportunities in Rentals and MBS

The housing market in June 2025 is navigating a delicate balance between elevated mortgage rates and shifting affordability dynamics. With 30-year fixed rates hovering near 6.75%, buyers face unprecedented challenges, while rental demand surges. For investors, this environment presents both risks and opportunities in rental real estate and mortgage-backed securities (MBS). Let's dissect the trends and identify where capital can thrive.

The Mortgage Rate Landscape

As of June 2025, the average 30-year fixed mortgage rate stands at 6.75%, a slight dip from earlier peaks but still historically high. Projections suggest rates could edge lower to 6.5% by year-end, driven by potential Fed rate cuts. However, inflation risks and geopolitical tensions—such as Middle East conflicts and tariff policies—could delay easing.

Despite modest declines, rates remain far above pre-pandemic lows, stifing homebuyer demand. Refinance activity, meanwhile, has stalled, with rates only marginally lower than existing mortgages. This “golden handcuffs” effect keeps homeowners locked into their homes, further tightening inventory.

Housing Affordability: A Regional Divide

The affordability crisis is not uniform. Coastal markets like San Francisco and Boston face 191% higher buying costs than renting, while Midwest cities such as Detroit and Syracuse offer parity. Key regional trends:

• Northeast/Midwest: Markets like Rochester, NY (+9.1% annual price growth) and Cincinnati, OH (+6.9%) combine affordability with strong demand.
• South: Texas and the Carolinas attract migration-driven growth, while Florida's Sunbelt cools.
• West Coast: High prices persist, but California's Oakland saw prices drop 6.7% annually.

First-time buyers now represent just 24% of purchases, down from historical averages, as median home prices hit $414,000—a record high. Family support (38% of buyers) and larger down payments are critical for entry.

Rental Real Estate: A Resilient Sector

The rental market is thriving, particularly in Single-Family Rentals (SFR) and Build-to-Rent (BTR) developments. These sectors offer:

1. Stable Cash Flow: SFR rent growth outpaces inflation, with BTR projects targeting suburban buyers priced out of homeownership.
2. Geographic Focus: Invest in Midwest and Southern markets (e.g., Syracuse, Montgomery, AL) where price growth outpaces coastal regions.
3. Affordable Access: SFRs in affordable regions provide entry points for renters, with occupancy rates remaining high.

Investment Play: Target SFR portfolios in migration hubs like Texas or Carolinas. Look for properties with smart home features or green certifications, which command 4% premiums.

Mortgage-Backed Securities (MBS): Opportunities and Risks

The MBS market shows mixed performance. CMBS delinquency rates dipped to 7.3% in June, but sector splits are stark:

• Office Sector: Delinquencies rose to 12.1%, plagued by remote work trends and expiring leases. Avoid exposure to speculative office developments.
• Multifamily: While delinquencies increased slightly, multifamily remains resilient. Focus on B- and C-class properties in job-growth areas.
• Mixed-Use: Distress rates fell after loan restructurings, making these assets undervalued.

Investment Play: Favor agency MBS backed by government-guaranteed loans (Fannie/Freddie), offering lower risk. Avoid non-agency CMBS tied to office-heavy portfolios.

Strategic Investment Advice

1. Rental Real Estate:
2. Buy in affordability zones: Prioritize Midwest/South markets with strong rent growth and migration inflows.

3. Leverage HELOCs: Lower introductory rates (now below 7.5%) allow refinancing equity for renovations or acquisitions.

4. MBS Investing:

5. Agency MBS: Seek steady income via government-backed securities.

6. Avoid office exposure: Stick to multifamily or mixed-use MBS with diversified income streams.

7. Wait for Fed Moves: Monitor for September/December rate cuts, which could improve affordability and MBS pricing.

Conclusion

The housing market's bifurcation—high costs in coastal regions versus affordability in the heartland—creates clear investment paths. Rental real estate and select MBS sectors offer stability, while overexposure to office or overheated markets carries risk. For 2025, the playbook is clear: go where buyers can't—and renters will.

Investors who pair geographic insights with sector discipline will navigate this landscape successfully.