- Fixed income manager Ken Shinoda got his start in investing during the 2000s housing bubble.
- Now he works at the $122 billion bond shop founded by “the bond king” Jeffrey Gundlach.
- He explains why home sellers are going to cut prices and why it won’t trigger a market collapse.
Investing in bonds can often seem dull in comparison to its more glamorous counterpart, equities.
“I joke that sometimes I wish I was an equities investor because it seems like a much more hopeful place to be,” said Ken Shinoda, a portfolio manager at DoubleLine. “You can always make a case to buy equities all the time, depending on how you spin it. But in the fixed income world, it’s all about protecting the downside.”
An understanding of debt market dynamics, whether its corporate or mortgages, can also help unlock answers to some of investors’ most pressing questions about the economy and the investing landscape.
As a real estate debt investor, Shinoda has always had his “fingers on the pulse of the housing market” having started his career in the early 2000s, during the housing bubble, to joining the legendary $122 billion bond fund DoubleLine from inception.
This role places him in a prime position to examine one of the hottest questions on real estate investors and homeowners minds: Is the housing price bubble about to burst?
Home prices are going to start to slow
The US housing market is experiencing a boom in demand that easily rivals the early 2000s. The average home price is up 15% year-over-year, with more than 58% homes selling above list price in April, according to data from RedFin.
The era of easy monetary policy, combined with the changing working and living dynamics enabled by the pandemic, created a sellers’ market in the US.
Now, with interest rates on the rise and the 30-year fixed mortgage rate above 5%, it’s making housing affordability difficult. The National Association of Realtors monthly affordability index is at its lowest level in years.
“Buyers see that properties are not moving as quickly, so they take a step back expecting prices to go lower,” Shinoda said. “Sellers are going to have to start cutting prices.”
Already one in five sellers have had to drop their offering price, according to recent data from RedFin.
But this isn’t too concerning to Shinoda, because these price drops are coming off the peak of a major rally. This is just a normalization caused by higher rates, he said.
It doesn’t mean a nationwide collapse
“I just don’t see the setup for some big nationwide decline,” Shinoda said.
Housing supply and demand have played a huge role in the recent price surge and that dynamic hasn’t changed.
Several years ago, Shinoda would tell investors that the reason they should be exposed to mortgage credit is because of the all-time-lows in inventory. Now those inventory levels are even worse.
The number of homes available for sale are down 8% year-over-year, according to RedFin.
“I think some pockets are definitely going to weaken but on a nationwide basis, especially in the major metros,” Shinoda said. “I think there’s a lack of supply that is extremely supportive of home valuations.”
Even during the financial crisis, price declines were regional. Nationwide the price decline was around 35%, but a city like Dallas was only down 12%, whereas Miami was down 70%, Shinoda said.
“Some places may even pull back by 10% in home prices,” Shinoda said. “I mean, if you’re up 40%, 50% over the last 18 months, if you go down 5% to 10%, it’s not the end of the world unless you’ve just bought at the top.”
Demand also remains strong with millennials just hitting peak home-buying age. “The millennials are the second-largest generation since the baby boomers,” Shinoda said.
Another key difference between now and the 2000s housing bubble is the “supportive” rental picture.
In the 2000s, supply was incredibly high, so rents were cheap. Now that housing supply is so low, rents are just as high, if not higher, than monthly mortgage payments, he explained.
So, where to invest?
Taking into consideration this outlook, many of DoubeLine’s portfolios are weighted heavily to residential non-government guaranteed mortgages.
Some pockets of commercial real estate are also “pretty safe”, such as the industrial market.
“There’s obviously a lot of demand for industrial multi-family because of everything we talked about lack of building, you can increase rents on an annual basis because inflation is going up,” Shinoda said.
One of the best opportunities, however, is agency mortgages. They are the cheapest they’ve looked in 10 years since the
is no longer buying mortgage securities.
“You’re seeing spreads that are, again, the widest that we’ve seen in 10 years,” Shinoda said. “They’re in some instances, close to the same spreads you can get in corporate bonds without any credit risk.
So if you are of the opinion that we are going into a
as an investor you want to own something that’s had some yield advantage relative to treasuries but also it’s very defensive. The agency MBS market can provide you that today.”
Shinoda is telling clients who have been underweight this type of mortgage to “take another hard look at it.”