This corner of the muni market shouldn't be overlooked, Nuveen says

Nuveen Highlights Overlooked Muni Sector With Potential Benefits for Investors

Think of investing like planting a garden: sometimes, picking the right seeds at the right time can help your money grow, especially when everyone wants the same thing—like affordable places to live. That’s why housing municipal bonds are getting attention now.

Why Housing Bonds Matter for Investors

Housing municipal bonds, or “munis,” help pay for new affordable homes. When you buy these bonds, you lend money to towns or states, and they use it to build more housing. The best part? The interest you earn is usually free from federal taxes, and sometimes even state taxes if you live where the bond was issued.

With housing prices high and mortgage rates rising, more people are struggling to find homes they can afford. This is making housing bonds more common and, for investors, more rewarding. According to Nuveen, a big investment manager, these bonds now make up about 7% of the $4.4 trillion municipal bond market.

The Bull Case: Why Some Investors Are Excited

  • Extra Yield: Housing bonds with 10-year maturities pay about 3.58% interest, higher than the average 3.06% for other munis. That’s about 60 extra basis points, which can add up over time.
  • Tax-Free Income: The interest you earn from these bonds is usually not taxed by the federal government, and sometimes not by your state either.
  • Growing Market: Annual issuance of housing bonds has tripled since 2016, giving investors more choices and better prices.
  • Social Impact: By investing, you help fund homes for families, essential workers, and others who need affordable places to live.

The Bear Case: What to Watch Out For

  • Credit Risk: Some housing bonds, especially “workforce housing” ones, are riskier. They help essential workers (like teachers and nurses) but may not always pay back as reliably as others.
  • Interest Rate Risk: If interest rates go even higher, bond prices can drop. This could affect the value of your investment if you need to sell early.
  • Market Changes: If the economy slows or government budgets tighten, there could be less support for these projects.
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Types of Housing Bonds

There are a few main kinds:

  • Single Family Bonds: Issued by states to help first-time homebuyers. These are usually safe and highly rated.
  • Multi-Family Bonds: Used to build or fix up apartment buildings for families.
  • Workforce Housing Bonds: Help essential workers who make too much to qualify for low-income housing but can’t afford market prices. These have higher yields but more risk.

Many investors use a “barbell” approach—mixing safe single-family bonds with higher-yield workforce housing bonds for balance.

Historical Context and Extra Data

Housing affordability is at its worst level in more than 30 years, according to the National Association of Realtors (source). This means more people need help, and more projects are being funded with these bonds. In the past, municipal bonds have been a steady source of income for investors, even during tough times in the stock market.

Investor Takeaway

  • Look for Yield: Housing bonds now pay more than many other munis, especially if you focus on 10-year options.
  • Balance Your Risk: Mix safer bonds with some higher-yield options, but know your comfort level with risk.
  • Think Tax-Free: Remember the tax savings—especially if you owe a lot at tax time.
  • Check the Issuer: Bonds from your own state may save you even more on taxes.
  • Help Your Community: Your investment can help build homes for people who need them most, combining financial returns with social good.

For the full original report, see CNBC

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