Last week I highlighted the next big shift in the U.S. economy: The housing market recovery. I’ve been warning my readers against any temporary spikes in housing data as flukes, but now we’re seeing real improvements that are worth paying attention to.
The fact is that mortgage rates are at a record low — even though they ticked up a little last week, a 30-year fixed-rate mortgage still goes for about 3.76%. Compare that with the height of the housing boom, when the average rate topped 6.4%! The favorable rates have enticed more buyers into the market, so median home prices are at a two-year high and construction activity is also picking up.
So it’s no wonder that mortgage-financing companies Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) announced recently that they both turned a profit in the second quarter. This is big news because between the two of them, these companies own or back nearly two-thirds of all mortgages in the U.S.
Thanks to rising prices and fewer mortgage delinquencies, Fannie Mae posted a profit of $5.11 billion, compared with a $2.89 billion loss in the same quarter last year. Meanwhile, Freddie Mac reported a $3 billion profit. Investors were elated with this news, sending shares of both FNMA and FMCC up in the double-digits.
With all of these factors in play, the housing market is expected to contribute to overall economic growth for the first time in five years!
The boom years of 2005-2007 are not coming back anytime soon, but the economic data points to a more sustainable kind of recovery: one where the housing market takes one step backwards and springs two steps forward. While the recovery may continue in fits and starts, we are still light-years ahead of where we were three years ago and I’m recommending that investors start to cautiously tread back into housing stocks.
Be sure to run any potential investments through Portfolio Grader first.