But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The Federal Housing Finance Agency (FHFA) House Price Index
The FHFA House Price Index differs from the other house price indices like Case-Shiller and Radar Logic in that it only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means all the home prices are below the conforming threshold, which is $417,000. It also means the borrower has a mortgage, which eliminates cash-only transactions. And finally, the FHFA House Price Index eliminates jumbos. This makes it more of a central tendency index.
Real estate values are big drivers of consumer confidence and spending, so they have an enormous effect on the economy. The phenomenon of “underwater” homeowners—homeowners who owe more than their mortgage is worth—has been a major drag on economic growth. Underwater homeowners are reluctant to spend and can’t relocate to where the jobs are. So real estate and mortgage professionals watch the real estate indices closely.
Real estate prices are also a big driver of credit availability in the economy. Mortgages and loans secured by real estate are major risk areas for banks. When real estate prices start falling, banks become conservative and reserve funds for losses. Conversely, increasing real estate prices make the collateral worth more than the loan, which encourages banks to lend more.
18 consecutive months of year-over-year gains
The 8.8% year-over-year gain was the highest since mid-2006, and it puts the index back at August 2008 levels. While most indices showed the housing market bottoming about February of 2012, FHFA shows the bottom around May of 2011. Perhaps distressed sales dominated at the end of 2011, which pushed the other indices lower.
The theme of the real estate market for the past year has been tight inventory. This theme was borne out again in the National Association of Realtors Existing Home Sales Report. Professional investors (think hedge funds and private equity firms) have raised capital to purchase single-family homes and rent them. Lately, professional investors have reduced their buying, which is a sign that the easy money has been made in the distressed-to-rental trade.
Implications for mortgage REITs
Real estate prices are big drivers of non-agency REITs, such as CYS Investments (CYS), Newcastle (NCT), and Redwood Trust (RWT), and less of an important factor for agency REITs like Annaly (NLY) and American Capital (AGNC). In fact, increases in real estate prices can be a positive for the non-agency REITs and a negative for the agency REITS. When prices rise, delinquencies drop—which is important because non-agency REITs face credit risk. However for agency REITs, which invest in government mortgages, rising real estate prices can drive prepayments, which negatively affects their returns. Rising real estate prices also help reduce stress on the financial system, which makes securitization easier and lowers the cost of borrowing. Finally, REITs with large legacy portfolios of securities from the bubble years are able to stop taking mark-to-market write-downs and may revalue their securities upwards. Since REITs must pay out most of their earnings as dividends, higher earnings mean higher cash flows to investors.
© 2013 Market Realist, Inc.