REITs Betting Big on the Mortgage Market
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whalen at The Wall Street Journal in New York. With the government backing off investing in the mortgage market, investors are taking notice of an opportunity not seen as this strong in about six years. We'll check in with the journal's markets team for details in a moment. First, these money and market stories you should know. It seems that lower mortgage rates and a booming economy are doing little to boost housing prices. The Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 3.7% in the year ending in March, and that's down from 3.9% the prior month. And after several years in which housing costs grew much faster than incomes, home prices are now growing closer in line,
with wages.
What is the current state of the housing market and home-price trends?
In fact, home sales and price growth have been steadily slowing for about a year. With regard to sales of existing homes, they posted their 14th straight month of annual declines in April, falling 4.4% since the same month last year. Meanwhile, confidence among U.S. consumers rose in May as compared to April. The report from the conference board suggests that at least so far, consumers are undaunted by the potential effects of an extended trade dispute with China. Add to that the labor market and the healthy economy, and we could see a turnaround in consumer spending over the next several weeks and months. Consumers who were surveyed said they expect both business conditions and the labor market to improve further in the coming months.
And states and investment firms are using May 29th to draw attention to so-called 529 plans, which allow families to save and invest funds for a child's education and then make tax-free withdrawals to pay for related expenses, such as tuition and books. For example, babies born on May 29th in South Carolina get a $529 grant when their parents open an account through the state. Georgia has the sweepstakes. for $1,529 deposited into a new Georgia 529 account. And Oklahoma has a similar raffle with a $5,529 contribution prize. There are some restrictions to keep in mind when setting up funds through a state, and investment companies allow consumers to open funds as well. See the full story on WSJ.com or the WSJ app.
As the Federal Reserve lightens its portfolio of mortgage bonds that it had built up during the economic stimulus, real estate investment trusts are stepping in, and that has investors' attention. Wall Street Journal reporter Ben Eisen is here to discuss. So, Ben, these investment trusts that are known as REITs, they're buying up mortgages at a pace we really have not seen since 2013.
Exactly. What they're doing is they are buying up mortgage-backed securities, which are bonds that are made up of mortgages. And they've really kind of ramped up their buying over the last year or so. And you've seen that kind of happen as the Federal Reserve starts to trim the size of its portfolio of mortgage bonds, which it sort of accumulated over time. a number of years after the financial crisis. And banks, which are another big purchaser of mortgage-backed securities, have been pretty stagnant in that regard. So you've really seen this sector step in and become kind of a key source of capital for the mortgage market.
And for people not familiar, investors can make money off of REITs through dividends.
Exactly. REITs are required to pay at least 90% of their profits to investors via dividends. So you end up seeing you buy a stock, but much of what you actually receive comes in the form of income paid out in dividends.
And for investors, there's a set of pros and cons here by investing in REITs.
Yeah, for REITs, for any type of REITs, there are risks here. These are companies that buy up a series of assets and they often use leverage to do so. And when you buy the stock, you're sort of buying into that portfolio of what they own. So whether it's mortgage-backed securities or commercial real estate or whatever else it is, you are kind of buying into the ups and downs of the real estate market.
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