1 Big Reason to Be Optimistic About Housinghttp://www.fool.com/investing/general/2012/10/23/1-big-reason-to-be-optimistic-about-housing-2.aspx Arjun Sreekumar
October 23, 2012
By many measures, a recovery in the housing market looks to be under way. Nationwide home prices have improved markedly over the past year, as have sales of new and existing homes. There also appears to be a rebound in construction activity, as evidenced by rising housing starts and improved homebuilder confidence.
Rising home equity
So far this year, over 1.3 million homeowners have reached positive equity in their homes. According to Zillow, a leading provider of real estate information, nationwide total negative equity came out to $1.15 trillion as of the end of June, down $42 billion from the end of the first quarter.
The share of borrowers with negative equity fell especially drastically from Q4 2011 to the first quarter of this year. According to the Federal Reserve's Flow of Funds data, home equity in Q1 2012 improved at the sharpest quarterly rate in more than 60 years. And this trend shows no signs of slowing down.
According to CoreLogic, a leading provider of housing market information and analytics, roughly 600,000 underwater borrowers regained equity in their homes in the second quarter this year. As of the end of June, the percentage of homeowners with negative equity fell by 1.4% to 22.3%, as compared to 23.7% as of the end of the first quarter.
But the improvement in home prices wasn't the only reason for the falling number of underwater borrowers. Rising foreclosures also played a role, as banks seized delinquent borrowers' homes and allowed homeowners to sell their homes for less than what they owed through short sales. In the second quarter, banks and other lenders repossessed nearly 160,000 homes.
Who benefits from improving home equity
The negative equity issue tends to afflict younger borrowers more, with nearly half of borrowers under the age of 40 owing more than their homes are worth. Homeowners aged between 30 and 34 sported the most alarming rates of negative equity, at 50.8% as of the end of June. Borrowers aged 25 to 29 were at 47.6% and of those aged 35-39, 46.3% owed more than their homes were worth.
Importantly, some of the most rapid gains in home prices were in the states hardest hit by the housing bust and consequently had a large percentage of underwater homeowners. For instance, Arizona, Georgia, Florida, Michigan, and Nevada combined accounted for nearly 35% of total nationwide negative equity. In Arizona, home prices leaped by a staggering 17% compared to a year ago, representing the sharpest increase by far. And in Florida, Michigan, and Nevada, prices rose 6.6%, 4.8%, and 5.1%, respectively. Not too shabby.
So has housing finally turned the corner?
So far, QE3 has had a notable impact on mortgage rates. The average rate on a 30-year fixed-rate mortgage last week was 3.37%, down 20 basis points from September 12, the day before QE3 was announced, when it stood at 3.57%. While this rate reduction is certainly an improvement, millions of potential homeowners across the country are unable to reap the benefits due to extremely tight mortgage credit standards.
So it appears that the Fed's plan, while allowing banks to rake in huge profits from their mortgage businesses, may not have a substantial impact on the number of new loans, at least in the near-term. QE3 also may be bad news for a certain type of company -- the mortgage real estate investment trust, or mREIT.
With open-ended purchases of mortgage debt likely to lower long-term rates even more, these companies' already low net interest margins could decline further. Add to that the trend of rising prepayments, and it could mean some of those eye-popping dividends may be in jeopardy.
That's not to say that all mREITs are in trouble. While these headwinds impact the mortgage REIT sector as a whole, it's important to distinguish among companies. As Fool contributor Sean Williams notes, the situation boils down to differing risk profiles among mortgage REITs.
On the one hand, companies like Annaly Capital (NYSE: NLY