Will Fed's Mortgage Buying Juice the Housing Recovery?
Home prices are stabilizing, and new construction is bouncing back, but apparently the U.S. Federal Reserve isn't buying a bullish housing recovery.
Its announcement Thursday that it would buy up to $40 billion in agency mortgage-backed securities every month, with no clear finish line, says loud and clear that the Fed thinks housing needs more stimulus. (Read More: Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates.)
Mortgage rates are already hovering near record lows, but mortgage applications, especially to purchase a home, have been weak. So many have refinanced already at low rates, and so many more are unable to refinance because of lack of home equity or high fees.
As for home buying, the real growth in that area this year has been among investors on the low end, largely using all cash.
Supplies of foreclosed properties have been shrinking dramatically, as those investors swarm auctions and bid on bulk deals. (Read More: How Investors Are Skewing Home Price Recovery.)
The hot and still heating rental market offers potentially more rewards than the volatile stock market.
In turn, all that activity on the distressed end is pushing up home prices. While overall foreclosure activity is falling, we could see volumes of bank-owned properties for sale rising over the next few months, as banks look to take advantage of rising demand and prices.
We are already seeing spikes in foreclosures activity in states where these cases had been backed up in the courts.
“Bucking the national trend, deferred foreclosure activity boiled over in several states in August,” said Daren Blomquist, vice president of RealtyTrac. “In judicial states such as Florida, Illinois, New Jersey and New York, this was a continuation of a trend we’ve been seeing for several months now. The increases in Florida and Illinois pushed foreclosure rates in those states to the two highest in the country — supplanting the non-judicial states of Arizona, California, Georgia and Nevada. Previous to August, the nation’s top two state foreclosure rates have been from those four non-judicial states every month since December 2010."
As more of these properties come to market, investors will likely prevail, despite many potential owner occupants looking to get in on good deals. Again, this is because investors have the cash advantage. Even low mortgage rates won't help some potential buyers, because Fannie Mae and Freddie Mac are still increasing guarantee fees, which push rates higher. They could, however, mitigate some of the fee hikes.
"For everyday homeowners, QE3 should work to suppress mortgage rates at a time when they're artificially increasing. QE3 will offset the majority of the FHFA's new g-fees, and will help keep FHA loans affordable despite rising mortgage insurance premiums," argued Dan Green of Waterstone Mortgage.
But there is also plenty of uncertainty about the future of mortgage financing, depending on the outcome of the November election, not to mention action the current administration is taking to shrink Fannie Mae and Freddie Mac. (Read More: 'Wind Down' of Fannie, Freddie: 'Positive for Housing'?)
"One new wrinkle is the recent announcement that Fannie and Freddie will be required to shrink their own retained MBS portfolios faster than expected," noted Guy Cecala of Inside Mortgage Finance. "This could slightly dilute the impact of the Fed's action since its increased purchases may be offset by less GSE purchases."
To see the low interest rates are not the housing cure-all, one need look no further than weekly mortgage applications numbers, which have been lackluster of late to say the least. The one benefit could be in the refinance segment of the market, especially as there is a new push to broaden the administration's current refinance program for underwater borrowers. More refinances mean more money in consumers' pockets. Unfortunately the Democrat-led effort is unlikely to make its way into reality, given the rising Republican opposition as election day nears.
No question more and more Americans will be turning to the housing market this fall, as home ownership is now cheaper than renting in all of the 100 largest U.S. markets, "by a wide margin," according to a new report from Trulia.com. (Read More: As Housing Recovers, Will Apartment Boom End?)
What remains to be seen is how many potential buyers will be able to take advantage of these low rates, given the still tight lending standards that rule today's market.
—By CNBC's Diana Olick