Housing stocks and mortgage real estate investment trusts don’t always present the best returns. However, times have changed due to resilient interest rates and high credit spreads.
Fixed-income investments are usually characterized by an inverse relationship between income-based and price-related returns. As such, investing in fixed income requires skill. However, mortgage vehicles work slightly differently. Mortgage-backed assets possess what’s called negative duration, meaning they gain in value as interest rates rise and lose value as interest rates fall. Therefore, unlike most other fixed-income assets, the income-based component and value-based aspect of mortgage vehicles are positively correlated.
Inflation in the United States has sustained, leading to an unexpected hold-up of interest rate tapering. Although interest rates may recede in late 2024, economic policy looks set to remain restrictive in the short term. As such, a tactical play on mortgage and housing stocks is up for grabs.
Here are three mortgage and housing stocks worth considering.
Top Mortgage and Housing Stocks: Walker & Dunlop (WD)
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Walker & Dunlop (NYSE:WD) is one of the largest commercial real estate financing and advisory services in the U.S. With operations spanning more than 40 locations, the firm is rated the best delegated underwriting servicer by Fanie Mae. I’m a fan of Walker & Dunlop due to its reputation as a company with high-quality internal operations. Moreover, it’s evident that Walker & Dunlop is optimally diversified with offerings in conventional multifamily, affordable housing, student housing, and land, to name a few.
Wedbush analyst, Jay McCanless ran a quantitative model in December, which labeled Walker & Dunlop as a best-in-class asset. McCanless followed a top-down methodology, stating that “a 10-year below 4.50% could allow for some incremental boost to transaction volumes, which have remained stagnant for much of 2023.”
I concur with McCanless’ take. However, more color is needed regarding Walker & Dunlop’s idiosyncratic prospects.
Walker & Dunlop’s portfolio has a default rate of merely 0.05% while delivering tremendous value. Approximately 12% of the firm’s portfolio consists of floating-rate loans, allowing for upside capture in today’s interest rate environment. In addition, Walker & Dunlop’s loan book has $3.4 billion in debt maturing in two years or more. Thus allowing the firm to borrow short-term and invest in profitable higher-yielding medium-term debt.
Furthermore, Walker & Dunlop has delivered stellar returns to its shareholders in the past 10 years. The company’s investors have experienced gains of approximately 688% in the past 10 years, and that number looks set to expand, given the firm’s latest 3.2% quarterly dividend raise to $0.65 per share, which lends a dividend yield of approximately 2.76%. Although Walker & Dunlop’s price-to-book ratio of 1.81 times can be considered slightly elevated, its prospective earnings and asset base growth are intact, presenting the possibility of a rearranged price-to-book ratio.
I’m definitely bullish here!
Greystone Housing Impact Investors (GHI)
Depiction of the housing market on a blue graph. Fears of a housing market crash.
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Greystone (NYSE:GHI) operates in the middle of the mortgage value chain. The company buys, holds, deals, and actively trades mortgages. Although it often invests as a risky leveraged vehicle, its mix of construction and permanent financing for affordable multifamily, student housing, and commercial properties presents a diversified portfolio with optimized risk-return benefits.
Delineating Greystone’s balance sheet shows that it primarily holds $221,653,300 worth of government issuer loans and $120,508,204 property loans. The loans present solid returns. For instance, Greystone Housing Impact Investors’ annualized flow-through dividend yield for 2023 settled at 8.84%, with its leverage ratio running at 73% in its third quarter. The entity’s performance could increase even further in due course, given the sustained interest rates in the U.S. paired with sky-high mortgage rates. Moreover, observing the business’ liabilities shows that approximately 19% of Greystone’s capital structure consists of long-term-orientated limited partner equity, allowing for high leverage to capitalize on opportunities without falling victim to short-term liquidity demands.
As mentioned before, Greystone has a solid dividend profile. However, an opportunity for price gains exists. For example, GHI’s price-to-book ratio of 1.09 times is tame, considering Greystone’s recent financial performance, which saw its fourth-quarter revenue reach $25.18 million, a 14.3% year-over-year increase. Additionally, GHI is trading above its 10-, 100-, and 200-day moving averages, illustrating a momentum pattern has occurred. Therefore, this suggests its fundamental and technical attributes are aligned. This is one of the most solid housing stocks you can grab.
Dynex Capital (DX)
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Dynex Capital (NYSE:DX), which is a mortgage REIT, might seem esoteric to many as it trades mortgage-backed securities while capitalizing its acquisitions with short sales of other securities. However, it’s actually a straightforward concept. Dynex executes what’s called a repo trade model. It sells short-dated securities with lower risk premiums to raise capital and then invests that capital into longer-term securities with higher risk premiums. Thus taking advantage of an arbitrage opportunity.
A glance at Dynex’s portfolio shows that it primarily operates in residential and commercial mortgage-backed securities. The mortgage REIT has struggled for organic profitability in recent quarters due to high short-term funding rates. However, its asset base has received support from elevated interest rates. I believe sustained short-term interest rates will bolster Dynex’s asset value even further, allowing its market price to roam free, especially considering the security is trading at a price-to-book ratio of merely 0.91 times.
Even though I am bullish about Dynex Capital’s short-term prospects, it’s a tactical play instead of a long-term investment. Lower interest rates will likely occur in late 2024, concurrently hurting the vehicle’s asset value. However, it’s evident that Dynex is underpriced for the time being as the market underestimated the resilience of interest and mortgage rates.
Lastly, Dynex sports a solid dividend yielding at 12.77%. Thus adding a floor to its market price while presenting a dividend capture opportunity.
DX is a solid trade for tactical investors!
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve has passed CFA Levels 1 & 2 and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.
