Real Estate, Mortgage Rates, and the Second Leg of the Credit Cycle
Why the 2008 comparison is getting falsified by the data, how the XLRE and ITB divergence maps to real rates, and why negative real rates would unlock the entire sector
Today, I walked through the full real estate framework in the macro context. Home prices are still at highs despite mortgage rates at cycle elevation, delinquencies are nowhere near 2008 levels, the mortgage index is ticking up off cycle lows, and the real interest rate setup is 78bps from unlocking another leg higher across the entire sector. Myself and Jaymes Rosenthal broke down the macro side of real estate, the XLRE versus ITB divergence, the mortgage-to-inflation-swap spread mechanics, and the specific stocks in the sector that are being amplified or disrupted by the AI theme. The full paid report with sector attribution is attached below.
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. Everyone calling for another 2008 in real estate has been falsified by the data, not my opinion. If you were bearish in 2020 or 2021 and did not buy a house, you are now structurally worse off. Home prices are higher, mortgage rates are higher, and the people who locked in sub-4 percent mortgages at low cost basis have no incentive to sell. That is not a collapsing market. That is the most resilient housing structure we have seen in modern history, and it has been resilient through one of the fastest rate-hiking cycles ever recorded. Connect your view to the data or abandon the view.
2. The mortgage payment math is what actually drives real estate, and it is locked in for the majority of homeowners. Median home price mortgage payments went from roughly 1,000 dollars in the 2015-2020 window to materially higher as the interest rate component spiked. The people who bought during the 2020-2021 window have that lower payment locked in for 30 years. Those homeowners do not sell unless the labor market cracks, which is the single variable that would change the entire thesis. We are not seeing that crack.
3. Mortgage delinquencies are not increasing. The narrative that defaults are exploding is anecdotal, not broad-based. Delinquencies only ticked up marginally through the 2022-2023 rate cycle. That is a fundamentally different setup from 2008, where delinquencies were already spiking before prices cracked. If you want a 2008-style unwind, you need delinquencies rising, supply flooding the market, and forced selling. We have none of those conditions right now. Pulling anecdotal evidence from one neighborhood and extrapolating to the national market is how bears have been getting cooked for five years.
4. Supply came online in 2023 and 2024 and got absorbed without breaking prices. That is the cleanest demand signal in the market. Building permits and housing starts spiked in 2021 and 2022. Those completions hit the market in 2023 and 2024. Under any bearish framework, that supply wave should have crushed prices. It did not. Prices consolidated slightly and held. That tells you demand is structurally stronger than every bearish narrative on Twitter. More supply is coming, but mortgage rates have come down enough to keep the supply-demand balance roughly stable.
5. The mortgage rate to Treasury spread is compressing, and that is a stimulative signal for real estate. The 30-year mortgage rate is at 6.39 percent, the 30-year Treasury is at 4.88 percent, and the spread between them is the credit risk premium for mortgages. When that spread widens, real estate gets squeezed. When it compresses, real estate gets support. The spread has been dropping, which is one of the structural reasons real estate has stayed bid even at elevated nominal rates.
6. Real purchasing power is now the dominant framework for real estate, not nominal rates alone. Mortgage rates relative to inflation swaps matter more than the headline mortgage rate. If nominal rates stay flat but incomes rise with inflation, people can afford houses again even without rates falling. That is the exact setup that is developing now. As real interest rates fall and incomes catch up, the real cost of carrying a mortgage drops even if the nominal payment does not. This is how the credit cycle transmits into real estate even without the Fed cutting.
7. XLRE and ITB are diverging for a structural reason: commercial real estate rolled over at higher rates, residential locked in lower ones. Commercial real estate typically has 5-year debt terms. REITs levered up in 2020 and 2021 at low rates. Those debts rolled over in 2023, 2024, and 2025 at much higher levels, which is why XLRE has not made new all-time highs. ITB, on the other hand, made a new all-time high in 2023 at elevated rates because the 30-year fixed mortgage structure means homeowners do not sell. The balance sheet duration difference is what explains the divergence, and it is also why XLRE is set up for the next leg higher as real rates fall.
8. 2-year real rates are 78 basis points from turning negative. That is the specific trigger for the second leg of the real estate melt-up. If real rates cross into negative territory, people get paid to take out debt on a real purchasing power basis. That is the environment that fueled the 2020-2021 real estate boom. If we get there again in the next 12 months, which is possible given the Fed’s current stance and where Warsh is likely to take policy, you will see capital flow into home builders, REITs, and commercial real estate in a way that most positioning is not prepared for. EQIX has already led. CoStar is on the disrupted side. The rest of the sector is setting up for a fundamental attribution split that the paid report breaks down in detail.
I would also encourage you to watch my friend Jaymes Rosenthal most recent video on the importance of understanding trading and risk management with how the world is changing right now.
Slide Deck and Playbooks
Slide deck from livestream:
The four reports that frame where we are in the credit cycle and the bets I am taking within it:
All of the credit cycle research:
The Melt-Up Trigger: The Playbook For The Credit Cycle Melt Up
Cross-Border Flows, the Dollar Devaluation, and the Global Trade Rebalancing
See the paid subscriber positioning report section here for detailed market views for this week: LINK
Tomorrow’s Capital Flows Livestream: Decoding the Warsh Testimony: What the Next Fed Chair Actually Said
Kevin Warsh testified before the Senate Banking Committee today. He laid out an explicit reform agenda that includes a new inflation framework, a smaller balance sheet, the end of forward guidance, and a fundamental rethink of how the Fed measures inflation and sets policy in an AI-driven supply-side regime. Tomorrow I go line by line through his most important statements, connect each one to the macro charts that make the transmission mechanism tangible, and map what a Warsh-led Fed actually means for rates, the dollar, the balance sheet, and the credit cycle melt-up. If you want to understand what the next two years of monetary policy are going to look like, you cannot miss this stream.
TOMORROW’S LIVESTREAM: LINK
Paid Subscriber Report On In-Depth Real Estate Sector Analysis and My Personal Thoughts On The Changes In Real Estate:
A 56-page deep dive on every stock in the S&P 500 Real Estate sector, with a 3-factor attribution engine breaking each name’s return into market, sector, and idiosyncratic components so you can see exactly where the dispersion is coming from. Every constituent gets a full-page profile with rolling attribution, rolling betas, and a specific “what you’re actually trading” read — plus a position-sizing framework that maps every name to the macro book actually driving it. Use it to tilt your exposure inside the sector rather than settling for a passive weighted average of fundamental winners and fundamental losers.
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