MW Here's the 8% return investors in cash could be missing out on. Psst, it relates to the housing market.

By Joy Wiltermuth

A refinancing wave of mortgages taken out over the past 12 months at peak rates is hitting the U.S. housing market

Corners of the U.S. housing market appear to be perking up as interest rates fall and the Federal Reserve works to bring down borrowing costs for households and businesses.

The good news is that a mortgage-refinancing wavelet has started to take hold, with applications from borrowers looking to lower their mortgage costs climbing by 24% in the past week, according to the Mortgage Bankers Association.

Read: Homeowners scramble to refinance their mortgages as rates dive to lowest level in 2 years

But it's largely a refinancing wave limited to a small group of homeowners who took out 30-year mortgages at peak rates of above 7% over roughly the past 12 months, who now can refinancing at close to 6%, said Clayton Triick, head of portfolio management at Angel Oak Capital Advisors.

In practical terms, the bulk of outstanding 30-year mortgage loans still carry much lower pandemic rates around 4%, which, from a mortgage-investor standpoint, should mean higher yields for the foreseeable future.

This holds true even as the Fed gears up on Wednesday to lower interest rates for the first time in four years, while also trying to stave off further weakening in the labor market.

What matters more to Triick than the size of the Fed's first rate cut will be what Fed Chair Jerome Powell has to say about the forward path of interest rates - and the health of the economy.

In his view, housing and consumer credit both look poised for a bull market over the next few years, even if the unemployment rate ticks up and defaults among renters and lower-income borrowers edge higher.

That's partly because the Fed's Powell has indicated little tolerance for further weakness in the labor market, as many homeowners already benefit from ultralow mortgage rates and home-price appreciation since the COVID-19 pandemic.

"The Fed put is alive and well," Triick said Wednesday, adding that the Fed has signaled a willingness to step up with support if there were any huge changes in the labor market.

Triick also expects big growth in second liens on homes and home-equity lines of credit if the labor market weakens, given the trillions of dollars in tappable home equity in the U.S. housing market.

Borrowers, while hesitant to tap their homes for equity since the global financial crisis, could start taking out a second form of debt against their homes if they end up losing a job and have children to take care of, he said.

Angel Oak, which set up shop in the wake of the 2007-2008 global financial crisis, specializes in housing, consumer debt and corporate credit. It oversees $17 billion in assets under management, including through a series of closed-end and exchange-traded funds.

The firm's roughly $74 million Angel Oak Mortgage-Backed Securities ETF MBS, which invests in mortgage credit, was on pace for a 8.7% return on the year, according to FactSet. The Angel Oak Income ETF CARY, which invests in residential and other fixed-income bonds, was up 8.2%.

Triick said that's up from closer to a 1%-2% for several of the firm's fund through much of 2024, until about mid-June. "That's a huge change," he said, while noting that many investors hunkering down in cash earning 5% could soon see yields drop to closer to 4% as the Fed starts cutting rates.

"Investors are just waiting too long to get out of cash," Triick said.

Ahead of the Fed decision, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was near 3.69%, slightly above its yearly low of 3.622% set on Monday, according to Dow Jones Market Data. Stocks were roughly unchanged, with the Dow DJIA, S&P 500 SPX and Nasdaq Composite COMP still near record highs.

-Joy Wiltermuth

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September 18, 2024 13:16 ET (17:16 GMT)

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