A Window for High-Yields: Fast-Moving Advisors Could Gain an Edge
For financial advisors and income-focused investors, the search for high-yield, low-volatility opportunities is critical. Traditional fixed-income investments have struggled to deliver sufficient returns, leaving many advisors seeking alternatives that balance income potential with risk mitigation.
Enter residential credit — a sector supported by record-high homeowner equity, minimal leverage, and structural supply constraints. These forces have created an environment where residential credit investments can generate yields approaching or exceeding 10%—nearly double what’s available in traditional fixed income markets.
Below we outline how the current environment offers a potentially compelling income opportunity in residential credit, the macroeconomic forces shaping the sector, and what financial advisors need to know.
1. Record-High Homeowner Equity: Foundation of Stability
With $35 trillion in aggregate homeowner equity, U.S. homeowners may never have been in a stronger financial position. Today’s housing market has exceptionally low mortgage debt with an aggregative loan-to-value (LTV) ratio below 30% — the lowest in decades. This immense equity cushion and minimal leverage provides:
1. Reduced default and systemic risk – Homeowners with substantial equity are less likely to walk away from their mortgages. Low LTV ratios mean borrowers have significant equity buffers, reducing the risk of default.
2. Stronger collateral backing – Lenders have significant security, reducing losses in the event of default.
3. Diminished volatility with residential credit investing – Strong borrower equity minimizes volatility in credit performance.
4. Favorable risk-return profile – Low-leverage environments provide stability for credit investors while allowing for attractive yield generation.
Why It Matters for Investors
Unlike during the 2008 financial crisis—when home equity was shrinking, lending criteria was lax, and excessive leverage led to instability—today’s market is driven by well-capitalized borrowers. For income-focused investors, this means residential credit instruments can offer attractive, risk-adjusted returns with downside protection.
2. Stronger Credit, Stricter Standards: A Market Unlike 2008
Unlike the years leading up to 2008, today’s borrowers face more stringent underwriting, keeping credit quality high. In fact, the percentage of home borrowers with credit scores of 760 or higher has nearly tripled since the early 2000s from approximately 20% to over 60%.
Moreover, lenders require larger down payments and limit risky loan products like subprime mortgages. A more cautious approach to mortgage lending makes it harder to qualify for a loan compared to pre-crisis times and improves credit quality for investors.
3. Persistent Supply/Demand Imbalance
The U.S. housing market is experiencing a severe shortage—nearly 10 million units.
New construction and home completions dropped to historic lows after 2008. Each year since, U.S. household formations have outpaced new housing completions. In 2021, supply briefly almost met demand in the aftermath of the pandemic, which tempered new household formation, but only briefly.
Today, inflation and higher interest rates have driven up construction costs, while zoning restrictions in many markets have slowed new development, limiting new housing supply overall.
4. How This Shortage Supports Residential Credit Investments Today
The combination of a housing shortage and tougher lending standards creates a compelling environment for residential credit. A 60% increase in home prices over the past five years underscores the value of residential real estate-backed investments.
Even against a background of Fed-driven increases in mortgage rates limiting demand, buyers must compete for the heavily limited housing stock, bolstering values.
Beyond driving home prices higher, this persistent supply shortage has another critical consequence: it reinforces the “lock-in” effect, keeping homeowners from selling and further constraining housing turnover. This unique market dynamic has profound implications for credit investors.
5. Rate Lock-In: A Market Quirk Benefiting Credit Investors
Since 2022, mortgage rates more than doubled as a pandemic-driven inflation spike compelled the Fed to raise rates. In 2024, the Fed eased off on short-term rates, but longer-term rates remain stubbornly high due to inflation fears and government borrowing pressures. As a result, mortgage rates also show no sign of dropping.
The result? The vast majority of homeowners are locked into historically low rates from 2020-2021, creating three key benefits to residential credit investors:
1. Low default risk – Homeowners with 3% mortgages are highly incentivized to stay in their homes.
2. Reduced housing turnover – Fewer home sales means lower prepayment risk for mortgage-backed securities and loans.
3. Stable income streams – As homeowners stay put, credit performance remains strong and some income streams expand, such as home equity loans.
This unique "lock-in" effect has led to historically low delinquencies and foreclosures, supporting predictable income as well as higher yields for investors in residential credit.
6. Attractive Yields in Residential Credit: A Compelling Alternative to Fixed Income
An exciting aspect of today’s residential credit market is its income-generating potential, with yields in excess of traditional fixed income. The U.S. Federal Reserve hiked rates 11 times starting in March 2022 to fight inflation, increasing the yields available to residential credit investors. Although the Fed began easing short-term rates in September 2024, persistent inflation and U.S. Treasury borrowing demands have kept longer-term and mortgage rates elevated.
Why Residential Credit?
For advisors looking to enhance client portfolios, residential credit offers institutional-level income potential with built-in risk mitigation.
7. Opportunity for Financial Advisors
Given the combination of high homeowner equity and low leverage, supply-demand imbalances, and historically strong credit performance, residential credit presents a timely opportunity for income-focused investors.
Accessing this market requires specialized expertise, analysis, and market insight. The structure of the investment vehicle is critical, allowing investors to access opportunities across the liquidity spectrum and enhance yields through carefully applied leverage. Non-traded real estate investment trusts (REITs) may be the structure to consider for clients to access this market.
The Time to Act Is Now
The $13 trillion residential credit market is at a pivotal moment, offering a distinctive combination of high-income potential and strong credit fundamentals. For advisors, this is an opportunity to diversify portfolios with assets that provide stable, attractive yields in a market environment unlike others in recent history.
Advisors who understand and act on this market shift will be best positioned to deliver superior income solutions. Discover how expert residential credit managers deliver high-yield, risk-adjusted returns—and how you can position your clients to benefit.