Housing-Related Assets Attractive as Prices Bottom, Pimco Says
Assets tied to U.S. housing are attractive with the real-estate market poised to reach a bottom, according to Pacific Investment Management Co.
“While Pimco’s base-case forecast is for national home prices to decline somewhat further before stabilizing, we believe the market is embedding too great a risk premium into housing-related investments,” Joshua Anderson, a portfolio manager at the Newport Beach, California-based firm, and Emmanuel Sharef, a structured credit analyst, wrote in a commentary posted on its website.
U.S. home prices, after declining 35 percent through February from a 2006 peak, gained 3.6 percent through May, according to an S&P/Case Shiller index of values in 20 large metropolitan areas, fueling speculation that a recovery is under way. The slump sparked the worst global financial crisis since the Great Depression and has left more than 11 million Americans with mortgages owing more than the value of their properties, according to CoreLogic Inc.
“While housing would not be spared in a broad-based economic downturn,” Anderson and Sharef wrote, “the collection of potential market outcomes is now skewed to the upside, rather than to the downside.”
The firm raised the mortgage holdings of its $270 billion Total Return Fund (PTTRX), the world’s biggest mutual fund, in March to 53 percent, the highest share since 2009, before reducing them to 51 percent in July, according to the company’s website. Those investments typically focus on government-backed home-loan debt.
The most attractive strategies for investing for a housing recovery include buying homes to rent out, purchasing nonperforming loans and acquiring so-called non-agency residential-mortgage securities without government backing, according to Pimco’s Anderson and Sharef.
Typical prices for the most-senior bonds tied to option adjustable-rate mortgages, a type of non-agency debt, soared to 62 cents on the dollar last week, from 49 cents in November, according to Barclays Plc data. Since the housing slump began accelerating in 2008, the values have ranged between a low of 33 cents in 2009 and as high as 65 cents in February 2011.
Yields for the securities based on JPMorgan Chase & Co. analysts’ projections for losses on the underlying loans have fallen to between about 7 percent and 8 percent, according to an Aug. 17 report from the bank. Subprime debt offers similar yields to the losses forecast by the analysts led by John Sim, who wrote that home prices hit a bottom earlier this year and will be down 1.6 percent all of 2012, before growing 1.4 percent in 2013 and 3.7 percent in 2014.
Option ARMs can allow homeowners to pay less than the interest they owe by increasing their balances, while subprime loans were granted to borrowers with poor credit or high debt.
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