Key Points in This Article:
Berkshire Hathaway’s 13F filing shows new stakes in homebuilders, signaling Buffett’s confidence in the market.
The housing market continues to struggle with weak home sales and high mortgage rates.
Potential September rate cuts could boost housing demand and mREIT attractiveness.
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Earlier this week Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) released its latest 13F filing revealing Warren Buffett’s renewed interest in homebuilders. The report showed the Oracle of Omaha established new stakes in companies like D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and NVR (NYSE:NVR).
This move echoes his 2023 investments in the sector, signaling confidence despite a turbulent housing market. The industry is showing signs of strain: the National Association of Realtors’ existing-homes sales report indicated a 2.7% drop in sales, while the median price rose 2% to $435,300 — the highest level ever. The Census Bureau says new home sales rose 0.6% from May, but they are down 6.6% year-over-year.
High mortgage rates, averaging 6.58% for a 30-year fixed loan, have dampened demand. Homebuilder confidence remains low, as the National Association of Home Builders/Wells Fargo Housing Market Index was at 33 last month, only one point higher than in June.
Yet, anticipation of Federal Reserve interest rate cuts in September 2025, potentially by 25 to 50 basis points, could ease borrowing costs and spur demand. Will a housing rebound make mortgage REITs (mREITs) more attractive and are the two ultra-high-yield mREITs worth buying now?
Annaly Capital Management (NLY)
Annaly Capital Management (NYSE:NLY), yielding around 13%, is a diversified mREIT investing in mortgage-backed securities (MBS), residential and commercial loans, and mortgage servicing rights. Its portfolio is heavily tied to agency MBS, which are backed by government-sponsored entities like Fannie Mae, Freddie Mac, and Ginnie Mae. That helps reduce credit risk but exposes it to interest rate fluctuations.
Lower rates could compress NLY’s net interest margin if prepayments rise, since borrowers refinancing at lower rates would reduce the value of its fixed-rate securities. However, NLY’s active portfolio management and hedging strategies help offset some of the risks.
In the second quarter, Annaly reported a book value of $18.45 per share, down slightly from Q1’s $19.02 per share and off the year-ago figure of $19.25 per share. Yet the mREIT was able to deliver a quarterly dividend of $0.70 per share, up over 7% from last year.
For income-focused investors, NLY’s high yield is appealing, but its sensitivity to rate changes warrants caution. Conservative investors may want to wait for clearer signals of sustained rate cuts before buying, while risk-tolerant investors might see value now.
AGNC Investment (AGNC)
AGNC Investment (NASDAQ:AGNC), with a 15% yield, focuses almost exclusively on agency MBS, making it a purer play on the mortgage market. Its strategy benefits from stable spreads in a low-rate environment, as lower borrowing costs can boost demand for mortgages, increasing MBS values.
AGNC’s Q2 earnings showed a book value per share of $7.81, down from $8.41 per share at the end of December. The company maintained a consistent $0.12 per share monthly dividend. However, AGNC’s leverage (around 7.6x) amplifies risks if rates remain volatile or if spreads tighten unexpectedly. A September rate cut could enhance AGNC’s portfolio value, but rapid prepayments could erode returns.
Investors seeking high income might find AGNC compelling, especially if rates decline steadily, but its high leverage and rate sensitivity make it riskier than NLY. Those with a higher risk appetite might consider buying, while others should monitor rate trends.
Key Takeaway
Both NLY and AGNC offer high yields but face challenges from interest rate volatility and prepayment risks. Buffett’s homebuilder bets suggest optimism about housing demand, which could indirectly benefit mREITs if lower rates drive mortgage activity.
However, mREITs are not direct homebuilder proxies, and their performance hinges on rate movements and spread dynamics. Income-focused investors might buy selectively, but cautious ones should await confirmation of a stable, lower-rate environment.
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