Housing bonds turned a hefty 80% gain for the first half even as the entire municipal bond market was showing a 12% decline, Thomson Reuters data reported by The Bond Buyer show.
States issued $7.4 billion in housing bonds during the period, in 179 issues, compared to $4.2 billion through 134 issues in the first half of last year.
The boom may be slowing, though. The sector showed just a 16.9% gain for the month of June, according to the Thomson Reuters data.
Overall, the states issued $1.3 billion in housing bonds for June, up from $1.1 billion in the same period the year before. The number of issues increased from 30 in June 2012 to 35 this year.
The housing bond market has benefited from a new structure which generally replicates the mortgage pass-through, the workhorse of the mortgage-backed securities sector. It used to be, if someone prepaid, the money would go back to the issuing HFA (housing finance authorities) to be reallocated. Now, prepay money will go to the investors. Investors like this better.
Housing bonds represented about 5% of a total of $23.2 billion in municipal bonds done during June. That was a big 46% drop-off in total overall bonds from the year before month, when $43.4 billion were recorded.
Housing bonds are used by state HFAs to buy down interest rates on mortgages for low-income people or first-time homebuyers.
It will be interesting to see how this sector tracks in the months ahead. Is this a sign that mortgage finance, after years of decline, is on the rise again?
Rising interest rates, which everyone expects to continue, may actually be somewhat of a plus for housing bonds as it gives them more of a discount field to play with. (When a bank will offer a customer a 3.5% mortgage, it is hard to generate a big discount from that because the rate is so low to begin with.)
But for now, housing bonds are outperforming their field in a macro where money has been coming out of bonds and into the stock market (the two are rough countercyclicals for each other). We’ll see if that continues. But HFAs do a fine job in getting low-moderate folks into houses both on the residential side and on the multifamily side, where they administer the Low Income Housing Tax Credit. So let’s hope the good news continues.
