Mortgage Rates are Spiking, But Housing Recovery Still on Track

Jacob Harper |

housing pic

In May 2013 30 year fixed mortgage rates hit 3.35 percent, just four hundredths of a percent higher than the all-time low for the benchmark, set in fall 2012. The Fed engineered these low rates as a way to boost the long sagging housing market. But amidst expectations that government tinkering in the market will taper off, the rates have begun rising at a dramatic pace.

30-year fixed rates hit 4.46 percent in late June before dipping down to 4.29. According to a survey by housing website Trulia, 56 percent of homebuyers say they’d be discouraged from buying a home if rates go over 6 percent. A drop in home purchasing would be a major blow to any recovery. And it might signal that the economic recovery isn’t as rosy as once thought. As economist Paul Krugman notes, “Housing is the most important transmission mechanism for monetary policy.”

Housing Recovery is on the Horizon...

Unemployment is going down, and most other indicators point to a recovery. People have been buying homes at record rates. According to the National Association of Realtors, purchases of existing houses in June 2013 rose 4.2 percent to a 5.18 million annualized rate, the most since November 2009. And despite what Trulia found people claimed concerning willingness to make housing purchases when interest spikes, according to their own Price Mionitor, in June asking prices for homes rose 1.5 percent – indicating the market is still growing.

… or We're in a Prelude to a Housing Slump.

Some analysts are not convinced. California analysts Mark Hanson compared rising mortgage rates to the end of the home-buying credit in 2010. "That stimulus was so small compared to a 3.5 percent interest rate, it's almost not even a comparable, but it's the only thing I can find … when that stimulus went away, new home sales fell 38 percent in a single month, down 25 percent year-over-year, and existing home sales fell 30 percent over a single month, 24 percent year-over year." And CNBC’s Diana Olick claimed that while a 6 percent rate was acceptable in the robust 2000s, a lower rate like 3.5 has become “the new normal,” and that dire times lay ahead for the housing market.

Investors Gamble on Fannie Mae and Freddie Mac

One of the more interesting beneficiaries of the housing rebound is beleaguered mortgage companies Fannie Mae (FNMA) and Freddie Mac (FMCC). As the government has propped them up – both in their conservatorship and the bond buying program – the companies have started to turn astronomical profits. And investors have shown they believe in the companies once more. Freddie Mac averages a volume of 25.26 million shares a day, and Fannie Mae a volume of 60.85 million shares.

While investors clearly believe in the company and their profits – even causing a bubble in late May that saw both stocks briefly triple in value – there is no guarantee those investments will even pay off. If the companies get dissolved, the average investor will be paid back last. After the government, after preferred stockholders. Meaning that they could end up losing 100 percent of their investment. Some investors are so spooked by this notion they have already struck pre-emptively and sued to keep their investments. Hedge fund Perry Capital, who has invested heavily in the companies, filed a 34 page lawsuit in federal court alledging that the government has stolen profits of investors, and shuttling Fannie and Freddie would be tantamount to illegal government seizure of private property.

The chances of that lawsuit finding footing, or Fannie and Freddie ever being returned to full privatization, are slim, but should they be, the return for investors are enticing indeed. Fannie Mae currently sits at $1.52 a share, up a whopping 500 percent exactly since January 1. Freddie Mac is at $1.44 a share for a 447.53 percent gain.

Housing ETF Faring Well

A look at a popular housing ETF reveals mortgage and mortgage insurance companies are doing well . SPDR S&P Mortgage Finance ETF (KME) is at $50.82 a share, up 19.22 on the year. Nine of its top ten holdings are up on the year, and its largest holdings have all fared well. Old Republic International Corporation (ORI) is at $13.34 for a year-to-date gain of 24.06 percent. The Hanover Insurance Group, Inc (THG) is at $50.80 a share for a gain of 29.5 percent. And their largest holding, mortgage insurer Radian Group Inc (RDN) is up to 90.93 percent on the year to hit $11.85 a share.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
THG Hanover Insurance Group Inc 87.46 -0.23 -0.26 137,757
RDN Radian Group Inc. 14.89 0.00 0.00 2,257,787
ORI Old Republic International Corporation 17.65 -0.02 -0.11 998,142
CUIRF Currie Rose Res Inc 0.01 0.00 0.00 0

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