Current real estate deliveries were financed in the 2020-22 low-rate era, causing a temporary supply glut in high-demand sectors like Sunbelt apartments. Since new construction halted in 2023, today's depressed prices offer a unique entry point before supply normalizes and rents can accelerate.

The cost to build a new home is soaring due to inflation and labor shortages. This "replacement cost" acts as a price floor for existing homes. This mirrors the 1970s, when home values tripled even as mortgage rates doubled, suggesting that long-term fixed-rate debt on property is a powerful inflation hedge.

By utilizing closed-end funds with multi-year capital lockups, real estate debt investors avoid the redemption risks plaguing their open-end corporate credit counterparts. This stable capital base allows for greater use of leverage, helping to generate mid-teens returns on senior secured positions.

Home ownership is reframed as a high-risk financial instrument, not a safe investment. A mortgage constitutes a 5-to-1 levered, highly concentrated, non-cash-flowing bet on the economic future of a single zip code, making it far riskier than a diversified public market portfolio.

While strong demand has compressed risk premiums to historic lows across most fixed income markets, debt backed by commercial mortgages (CMBS) is a notable exception. CMBS spreads are significantly higher than their long-run average, presenting a rare value opportunity for credit investors in a market where yield is scarce.

Large banks have largely abandoned lending to mid-market home builders, who construct half of U.S. homes, because the relationships lack profitable ancillary services. This has created a significant capital gap, allowing specialized lenders to earn premium returns by financing these underserved builders.

The traditional 30-year mortgage for a primary residence is a suboptimal wealth-building tool. A more effective strategy involves securing long-term, non-callable debt to purchase productive, cash-flow generating assets, rather than tying up capital in a personal home.

Amid concerns over valuations and liquidity in corporate private credit, investors are shifting capital to residential real estate debt. This strategy offers tangible security, as loans are backed by physical houses rather than corporate cash flows, providing superior downside protection.

Oaktree sees superior relative value in non-qualified residential mortgage-backed securities (RMBS). The US housing market is under-supplied with tight lending standards. This contrasts sharply with commercial real estate, particularly the office sector. Investors can acquire these non-government backed loans at a discount, offering high-yield-like returns with diversification.