3 mREIT Stock Picks to Navigate Volatile Industry Trends

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The Zacks REIT and Equity Trust industry is facing volatility in mortgage rates on several evolving factors. As the Federal Reserve lowers rates, mortgage rates are likely to decrease gradually, thus improving purchase originations and refinancing activities. The mREIT industry will likely witness book value improvement in the near term as spreads in the Agency market tighten, driving asset prices.

However, the volatile scenario in MBS markets and restricted financial conditions might affect industry players. Companies like ARMOUR Residential, Inc. ARR, REDWOOD TRUST, Inc. RWT and Invesco Mortgage Capital, Inc. IVR are well-poised to navigate industry chaos.

About the Industry

The Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS) and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Such REITs also raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.

What's Shaping the Future of the mREIT Industry?

Relatively Lower Mortgage Rate to Increase Loan Demand: With inventories improving and buyers coming off the sidelines to take advantage of mortgage rates at a two-year low (as the Federal Reserve lowered interest rates by 50 basis points), purchase originations are bound to rise. However, mortgage rates started rising lately and have been up for five straight weeks. This has mainly been caused by the U.S. presidential election and mixed macroeconomic data. Though the average rate on the 30-year fixed-rate mortgage increased to 6.72% at the end of October from 6.54% at the end of September, the same declined from 6.73% at the start of August. The 30-year fixed mortgage rate hovered around 7% for most of the year.

Although uncertainty will remain, mortgage rates are cresting and are less likely to reach the highs seen earlier this year. Hence, mortgage rates are expected to fall through the end of 2024 and into 2025 from last year. With several potential inflection points happening lately, including the 2024 election and the Federal Reserve interest rate cut, mortgage rates are expected to remain volatile. However, compared with the year-ago level, mortgage rates are witnessing a declining trend. Mortgage rates will probably go down through the end of 2024 and into 2025, but the decreases should be gradual.