BlackRock Makes Case for Selective Industry Investment

Mortgage & Real Estate

BlackRock highlighted possible investment opportunities in certain mortgage-related equities, fixed income and real estate in a housing outlook study released Wednesday morning.

In equities, the BlackRock Investment Institute study suggested that large lenders are in a position to potentially profit from a housing market recovery based on reduced competition and higher margins in their business. But it also noted that these players face considerable regulatory and legal risks.

Careful selection of homebuilder stocks, based on geographic markets and strategies, might be attractive to some investors, according to the report. However, it also noted that the sector tends to react to sentiment and is highly competitive.

As far as fixed income, the study suggests prospects for the government-sponsored enterprises are a key catalyst in this sector. It paints a mixed picture for nonagency mortgage-backed securities. The report highlights their high yields and dwindling supply, noting that the sector can be attractive in terms of what it characterized as frequent mispricing. But it also cautioned that, due to government policy and the lower rates, there is prepayment risk in higher coupons.

In terms of real estate, the report discusses prospects for bulk purchases of single-family homes that can be bought at deep discounts in foreclosure-prone areas and converted to rentals. Conversely, in areas that have low foreclosure rates and are close to jobs and “quality” schools, it suggests developing land for homebuilders.

Among the aspects of the report debated in a question-and-answer session that followed contributors’ discussion of it was the effect of modifications and government programs on housing recovery.

In response to a question, Barbara Novick, vice chair and head of government relations and public affairs, told listeners that there is a moral hazard in terms of homeowners wanting a break on their loans because they see others getting one. She suggested a line should be drawn in terms of forgiveness and forbearance to address this.


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