FANNIE Mae and Freddie Mac are the leading indicator and director of mortgage interest rates. You and I are at their mercy to keep rates low in order for more homeowners to be able to buy or refinance to a cheap rate.
But when the company reports a quarterly profit of over $50 billion, it makes sense that investors would rush in to buy that company’s stock. That is just what happened when mortgage giant Fannie Mae reported a record net income of just over $58 billion for the first quarter. The company’s stock surged.
Since both Fannie Mae and Freddie Mac were put in government conservatorship during the housing and mortgage market crashes, they are required to pay all profits to the US Treasury department in the form of dividends. Shareholders get nothing.
But if the rates are raised higher like what is happening now, I believe they will be targeting a much higher dividend yield to be able to payoff the government loan and its shareholders. Ultimately get privatized. I strongly believe that Fannie and Freddie need to be back to Main Street (private firms) less scrutiny and much more flexibility.
What I am saying is that when rates do go up slowly it is actually good for the economy, it is good for investors and it will be overall good for everyone. Banks, fund manager, mutual accounts will have to offer you better yields for your parked monies. Although the borrowing rates will be higher it should have the trickle down effect where at the end of the day everyone benefits.
Home prices rising again
The median price of a newly built home soared to $271,600, the highest level on record dating back to 1963, according to a new report from the US Census. Prices are now 15 percent higher than they were a year ago for new construction and around 10 percent higher for existing homes.
“We’ve gone through a very long downturn and prices overcorrected. The first move is we’re seeing a kickback or reversion to normal,” said Stuart Miller, CEO of Lennar Homes, one of the nation’s largest homebuilders. “It feels like prices are on the move, but they’re just snapping back to pricing levels they should have been at.”
Short supply, cheap credit and rising demand are pushing overall home prices higher, but land is the issue in the new-home market. Builders are in fact slowing production to take advantage of pricing power, which is only adding to the still tight supply. It is a form of rationing.
Here what the builders are saying about how they are to price homes now a days.
Builders are slowing because they cannot find the next replacement community for the one they’re building through now. They don’t want to end up with nowhere to build. Luxury homebuilder Toll Brothers reported a 16 percent jump in the average price of net-signed contracts in its second quarter year-over-year.
“One year ago, we were somewhat reluctant to raise home prices for fear of crimping demand,” said Toll Brothers’ CEO Douglas Yearley Jr. in a release. “Now we are finding that in many markets as prices increase, a sense of urgency takes hold and demand continues to rise. We have raised prices this quarter approximately $26,000 per home on average.”
Caution, the draw back for me is that when the entire inventory comes back to a normal number what will happen to home sales, especially if rates are much higher now?
Another concern now is that home prices are rising too fast—faster than incomes and job growth. Realtors worry that, at some point, buyers will be priced out.
“These price increases are not healthy,” said Lawrence Yun, chief economist for the National Association of Realtors. “We need to moderate price growth and get more supply.”
But Lennar’s Miller disagrees:
“I think if you look at affordability right now, with interest rates where they are, and even if they go up a bit, we’re in a very comfortable place. There’s a lot of room for prices to continue to move up.”
Supplies of new and existing homes are at levels not seen since the frenzy of the last housing boom. The phenomenon is national and not just relegated to the former boom markets. April listings were down 41 percent from a year ago in Los Angeles, down 24 percent in Houston, down 27 percent in Washington, DC and down 29 percent in Minneapolis. While the stock of newly built homes on the market rose to an 18-month high, builders are still facing land and labor shortages, which will keep starts lower than they could or should be based on demand.
Interest rates have been moving steadily higher. After Wednesday’s speech by Federal Reserve Chairman Ben Bernanke, rates took another jump of 0.375 percentage points. Now 30 years fixed rate mortgages are averaging 3.75% use to be around 3.25%.
In the end, sales will come down to buyer confidence, affordability and mortgage rates. Even if that last one moves higher, rates are still historically low and confidence is gaining steam despite the rising prices.
I still feel optimistic about the economy and Real Estate; I think that if you can afford to pay 1/3 of your gross income towards a mortgage payment, you should explore the idea of becoming a homeowner.
* * *
Please call Ken Go of 1st Innovative Finance Group at (562) 697-7028 or call (562) 508-7048 or write to [email protected] for your further inquiries and comments.
