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Tuesday, December 18, 2018

MANAGING DIRECTOR:
Scott Carrithers
 
PORTFOLIO SALES AND SERVICE:
Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty
Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer
 Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen

US Treasury Market
Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
12/11/18 2.28 2.41 2.55 2.70 2.78 2.78 2.75 2.81 2.89 3.02 3.13
12/12/18 2.30 2.43 2.56 2.70 2.77 2.78 2.77 2.84 2.91 3.04 3.15
12/13/18 2.36 2.43 2.56 2.69 2.75 2.76 2.75 2.83 2.91 3.05 3.16
12/14/18 2.36 2.42 2.56 2.68 2.73 2.72 2.73 2.81 2.89 3.03 3.14
12/17/18 2.36 2.40 2.54 2.66 2.70 2.68 2.69 2.77 2.86 3.00 3.11
                                                                                                                                       Source: U.S. Department of the Treasury, as of 12/17/2018

Investing in Multi-Family Housing Units

This morning the housing market saw some relief with housing starts and building permits coming in better than expected, rising 3.2% and 5.0%, respectively.  After several years of steady advancement, the housing sector has hit choppy waters that has slowed down its advancement.  This slowdown is no surprise considering the mix of rising prices and higher mortgage rates that decrease affordability.  After the housing bubble in 2006, single-family home prices (Graph 1) found its bottom in 2012 and have since climbed and home prices are now higher than what they were at the peak of the bubble.   

Graph 1: U.S. National Home Price Index on Single-Family Housing

 Source: Bloomberg, 12/18/2018

 
Though today’s housing data came in positive, both housing starts and building permit show a slowdown on a 6- and 12-month moving average.  Taking a deeper look though, it is the multi-family units that are performing well while single-family housing is slowing (Graph 2).  When affordability for single-family homes decrease, home buyers still have to live somewhere and multi-family units often times is the solution which will drive up demand and supply.

Graph 2: Single-Family vs Multi-Family Housing Starts

Source: Bloomberg, 12/18/2018

Strategy:
If you want more exposure to this multi-family unit sector, investing in Fannie Mae DUS (Delegated Underwriting & Servicing) mortgage bonds may be the way to do it.  Underlying collateral for the vast majority of DUS securities are multi-family apartment loans, however a small percentage of the DUS program consists of alternative collateral types (student housing, senior housing, manufactured homes, etc.).  At this time, we like FN AM8123 pool shown below - 2.92% coupon yielding 3.51% (~66bps over treasuries) with an average life of 9.9 years.  To learn more about DUS see Fannie Mae’s webpage (http://www.fanniemae.com/portal/funding-the-market/mbs/multifamily/index.html) or give us a call to discuss further.



Source: Bloomberg, 12/18/2018



                                                                                                                                                                       
                                           

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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