While higher borrowing costs and economic uncertainty moderated housing activity during the second quarter, we believe the environment remains attractive for specialized providers of residential real estate credit.

Demand continues to outstrip the supply of housing as household formation is still outpacing housing starts.¹ Reversing this imbalance may require significant development of new housing over an extended period, underpinning the need for off-balance sheet financing for homebuilders to acquire and develop entitled and permitted land.

At the same time, the inventory of existing homes for sale remains below the level generally associated with a balanced market.² With 69% of homeowners carrying mortgages at or below 5%, the “lock in effect” continues to limit the number of existing homes available for sale.³ This highlights the need to build additional housing and to renovate the aging stock of existing homes.

Moreover, the median age of owner-occupied homes now stands at 42 years, which supports demand for renovation capital because many of the homes that do change hands require substantial improvements prior to resale, creating opportunities to provide capital to experienced developers in supply constrained communities.⁴

Housing conditions remain highly regional because we do not think slower national transaction activity necessarily implies weak demand for move-in ready, appropriately priced homes in desirable neighborhoods. By focusing on experienced developers with deep knowledge of local markets characterized by favorable household income trends, population growth, limited supply and relatively low days on market, we continue to differentiate the opportunity set as a "market of homes” from a single "housing market."

The July gathering of the Federal Open Market Committee (FOMC) resulted in no change to the central bank’s key policy rate, which was held steady at 3.5–3.75%.¹ Three regional Fed presidents dissented in favor of a 25-basis point hike, suggesting that Chair Warsh could have pushed through a rate hike if so inclined. By choosing not to do so, Warsh positions himself as a predictable chair disinterested in surprising the market.

In his press conference, Warsh described two major developments since the June FOMC meeting: 1) a sharp increase in nominal and real Treasury yields, and 2) remarkable growth of business investment, which is pushing up some prices but preparing the ground for future growth. Interestingly, Warsh didn’t mention the collapse of the Iran/US memorandum of understanding and subsequent increase in oil prices that drove the big intermeeting increase in real yields.

While Warsh stressed that inflation is too high and needs to be brought down, his comments overall did not strike us as committed to a near-term rate hike. For example, while noting that the Fed seeks price stability, he also stated the central bank is trying to “understand inflation dynamics” absent the series of shocks—pandemic, wars, energy demand, tariffs—the economy has faced this decade. To us, this sounds a lot like the look-through strategy the Fed had been following under former Chair Powell.²

Note that there will be two more inflation prints before the next meeting in September. If these point to accelerating inflation, the Fed will be under increased pressure to hike. While today’s personal consumption expenditure inflation report came in lower than expected, the GDP report suggests strength in underlying domestic demand, with the economy increasingly reliant on artificial intelligence capex and a declining savings rate to support consumption.⁴