SFRs Catch the Eye of Fixed Income Investors

The US housing market continued its wild streak despite the COVID-19 pandemic and associated shutdowns, with CoreLogic’s National Home Price Index rising an impressive 9.2% year-over-year.  And according to new research from Pretium, the SFR market will continue thriving for the foreseeable future, with mortgage credit becoming an attractive, and viable,  fixed income strategy for investors.

SFR and mortgage credit have always been attractive yield alternatives, the Pretium report notes, especially since they’ve had less crowding than competitors. But analysts say 2021 will be a banner year for the asset classes–particularly “in a fixed income environment where low policy rates, quantitative easing, and now ‘Corporate QE’ have extracted much of the yields available from liquid securities.”

The SFR market has been an investor darling throughout the pandemic, and rents within the segment have consistently logged year-over-year increases. Single-family rents increased 3.8% year over year in January 2021, an uptick from the 2.9% rate recorded for January 2020, according to the CoreLogic Single-Family Rent Index, and are tending to follow a “K-shaped” recovery as the pandemic continues, providing good opportunity for investors.

“Developers and builders of single-family [rentals] can get top-notch pricing,” Tom MacManus, president, MONEY360 said on a panel discussion during GlobeSt. Apartments Spring 2021 virtual conference. And Trevor Koskovich, president of investment sales at NorthMarq, said in the same panel that he thinks the demand from the two largest demographic groups—baby boomers and millennials will drive growth. He said many millennials are so saddled with student debt that it may be hard for them to purchase a home. “The millennials that have dogs and are starting to expand their family for the first time are going to rent these,” he said.

Pretium also asserts that the SFR market is poised for consolidation, thanks largely to new technologies that broadened the base of institutional ownership. And should that happen, SFR will have a bolstered ability to absorb new flows of institutional capital without hurting return.

Similarly, the report notes, the mortgage credit side of residential housing markets provide good fixed income exposure and are likely to benefit from the increasingly hot U.S. housing market, which Pretium predicts will continue rising in 2021: “In particular, while mortgage forbearance policies have pushed serious delinquencies to impressively high levels,” the report states, “homeowners are equity-rich, and their debt service ratios are at 40-year lows—a social dividend on the re-regulation and conservative lending policies of the past decade. Thus, in dramatic contrast to the devastating experience of the Global Financial Crisis, most of these seriously delinquent mortgages have high potential to end with favorable economic outcomes for homeowners and investors alike.”