• Fixed income manager Ken Shinoda began investing during the housing bubble of the 2000s.
  • Now he works at the $122 billion bond shop founded by “bond king” Jeffrey Gundlach.
  • He explains why home sellers will lower prices and why that won’t trigger a market crash.

Investing in bonds can often seem boring compared to its more glamorous counterpart, stocks.

“I joke that sometimes I wish I was an equity investor because it seems like a much more promising place,” said Ken Shinoda, portfolio manager at DoubleLine. “You can still make the case for buying stocks all the time, depending on how you spin them. But in the world of fixed income, it’s all about downside protection.”

An understanding of the dynamics of the debt market, whether corporate or mortgage, can also help find answers to some of investors’ most pressing questions about the economy and the financial landscape. ‘investment.

As a real estate debt investor, Shinoda has always had “fingers on the pulse of the housing market” having started his career in the early 2000s during the housing bubble to join the legendary $122 billion bond fund DoubleLine since its inception.

“My training ground was really the global financial crisis,” Shinoda said. He now leads DoubleLine’s private mortgage opportunity funds and co-manages the total return portfolio, among other things.

This role puts him in a unique position to examine one of the most burning questions on the minds of real estate investors and landlords: is the real estate bubble about to burst?

House prices will start to slow

The U.S. real estate market is experiencing a boom in demand that easily rivals the early 2000s. Average home prices are up 15% year-over-year, with more than 58% of homes sold above list price in April, according to data from RedFin.

The era of accommodative monetary policy, combined with changing work-life dynamics enabled by the pandemic, has created a seller’s market in the United States.

Now, with interest rates on the rise and the 30-year fixed mortgage rate above 5%, this is making housing affordability difficult. The National Association of Realtors’ monthly affordability index is at its lowest level in years.

“Buyers are seeing that properties aren’t moving as quickly, so they are stepping back expecting prices to drop,” Shinoda said. “Sellers are going to have to start lowering prices.”

Already one in five sellers had to lower their offer price, according to recent data from RedFin.

But that’s not too worrying for Shinoda, as these price drops come at the height of a major rally. It’s just a normalization caused by higher rates, he said.

This does not mean a national collapse

“I just don’t see the pattern of a big decline nationwide,” Shinoda said.

Housing supply and demand played a huge role in the recent price spike and this dynamic has not changed.

Several years ago, Shinoda told investors that the reason they should be exposed to mortgage credit was historically low inventory levels. Now those inventory levels are even worse.

The number of homes available for sale was down 8% year over year, according to RedFin.

“I think some pockets are definitely going to get weaker, but nationwide, especially in the big metros,” Shinoda said. “I think there is a lack of supply which is extremely supportive of home valuations.”

Even during the financial crisis, price declines were regional. Nationally, prices were down about 35%, but a city like Dallas was only down 12%, while Miami was down 70%, Shinoda said.

“Some places might even pull home prices down 10%,” Shinoda said. “I mean, if you’re up 40%, 50% in the last 18 months, if you’re down 5% to 10%, it’s not the end of the world, unless you just bought at the top.”

Demand also remains strong, with millennials just reaching the peak home buying age. “Millennials are the second-largest generation since baby boomers,” Shinoda said.

Another key difference between today and the real estate bubble of the 2000s is the “favorable” rental image.

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?

Given this outlook, many of DoubeLine’s portfolios are heavily weighted to non-government guaranteed residential 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 multifamily buildings because of all the stuff we’ve been talking about about the lack of construction, you can increase rents on a yearly basis because inflation goes up,” Shinoda said.

One of the best opportunities, however, is agency mortgages. It’s the cheapest they’ve watched in the 10 years since the


Federal Reserve

no longer buys mortgage-backed securities.

“You’re seeing gaps that are, again, the widest we’ve seen in 10 years,” Shinoda said. “They are in some cases close to the same spreads that you can get with corporate bonds without any credit risk.

So if you are of the opinion that we are entering a


recession

as an investor, you want to own something that has had a yield advantage over Treasuries, but is also very defensive. The agency MBS market can provide you with that today.”

Shinoda tells clients who have been underweight this type of mortgage to “take a closer look.”