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Interest Rates Effect on MREITs

Tuesday, January 17, 2006
The raising interest rates have had quite an impact on the real estate market. The interest rate hikes affect the MREITs very severely. There are many cases where MREIT's have went down over 50% from their peak to their current position. I say their current position because I do not believe we have seen the bottom of the hole for these companies.

These MREIT companies were flourishing in the world of extremely low rates of the years past, but now that rates are being hiked, MREITs will be struggling. Just because most of these mortgage companies are struggling does not mean all of them have to be doing poorly though. There are so many ways to manage a mortgage portfolio. Some of the companies invest in "Jumbo" loans that Fannie May and Freddy Mac does not buy because of the size, some invest in fixed rate mortgages, some in adjustable rates, some in residential real estate, and some in commercial real estate. It also depends on how the business model was structured to allow for profit in a rough market.

Now knowing that there may be problems with the MREIT industry during times of increasing rates, what does that mean to the average investor? I have been thinking of this for the past few days (remember I am not a professional investor or anything of that nature) and what I could come up with for possibilities were: Shorting a fixed rate MREIT company until the rates start to go down again, purchasing soon and use it to hedge mortgages on my property, or avoid the whole industry until rates start to fall again and hopefully profits will go back up. Hopefully this helps you understand the MREIT industry a big, I will be writing some articles explaining how mortgages work and how MREITS fit into it in the future, but I figured this is important as it is a pretty current issue.