qThe Federal Housing Finance Agency (FHFA) House Price Index increased 7.1% year-over-year in February.
The FHFA House Price Index
The FHFA House Price Index is different than the other house price indices like Case-Schiller and Radar Logic in that it only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means that all of 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, it eliminates jumbos. This makes it more of a central tendency index.
Real estate values are big drivers of consumer confidence and spending, and, therefore, have an enormous effect on the economy. The phenomenon of “underwater” homeowners, or those who owe more than their mortgage is worth, has been a major drag on economic growth. Underwater homeowners are reluctant to spend and cannot relocate to where the jobs are. 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 are falling, banks become conservative and reserve funds for losses. Conversely, increasing real estate prices make the collateral worth more than the loan, which encourages them to lend more.
13 consecutive months of year-over-year gains
The 7.1% year-over-year gain was the highest since mid-2006. While most indices showed the housing market bottoming about February of 2012, FHFA has the bottom around May of 2011. Perhaps distressed sales were dominating 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. Professional investors (hedge funds, private equity firms) have raised capital to purchase single family homes and rent them. This has been driven by auctions from the Federal Government, primarily the FDIC and FHA. These entities have been auctioning off billions of dollars worth of real estate and required investors to hold them for a period of three years. This has had the effect of taking supply off the market (or at least the perception of supply) which has helped the real estate market find some support. These professional investors are competing for properties with first time homebuyers, which is making the starter home a scarce commodity.
Implications for mortgage REITs
Real estate prices are big drivers of REITs such as Annaly (NLY), Two Harbors (TWO), and Pennymac (PMT). When prices are rising, delinquencies drop, which helps the servicers and those who invest in non-agency (non government-guaranteed) mortgage backed securities. Rising homeprices can negatively affect agency REITs like MFA Financial (MFA) and Capstead (CMO) in that it will help allow more people to refinance their homes, which increases prepayment risk. Rising home prices also helps reduce stress on the financial system, which makes securitization easier and lowers the cost of borrowing, which is important to issuers of MBS like Pennymac (PMT) and Redwood Trust (RWT). Finally, those 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 means higher cash flows to the investor.