FREDDIE MAC & FANNIE MAE TO 'HELP' THE REAL ESTATE MARKET
Will Freddie Mac and Fannie Mae purchasing $200 billion in mortgage-backed securities help lower mortgage interest rates? In the short term I believe it will; however, as the bright economist Thomas Sowell has said, "There are no solutions, only trade-offs”. So what would some of these trade-offs look like?
First, we need to understand all real estate is local. What the real estate market looks like in Florida, is different than the market in Minnesota. Going even deeper, the real estate market in Minneapolis, MN is different than the market in St. Cloud, MN. There are even different markets within geographical boundaries. The waterfront market in the Annandale area is different than the multi-family market in the same area, and the $100,000 - $150,000 single family home market in Sauk Rapids is different than the $600,000 - $650,000 market in Sauk Rapids.
Secondly, when looking at the single family home market in the St. Cloud area, in general (for the reasons described above) we are sitting at a 2.5 months supply of inventory. What this means is given the current activity in the St. Cloud area real estate market, if no more homes are placed on the market (listed for sale), it would take 2.5 months for the current inventory of homes to sell. When viewing this number in terms of what is considered a balanced market it provides more context. The National Association of Realtors defines a balanced real estate market consisting of 4-6 months supply of inventory. Therefore, at 2.5 months supply we are currently sitting in a seller's market. However, looking at the supply side alone does not provide full context to what's happening with the real estate market.
The other variable to the market equation is demand. On the demand side we have seen a slowdown over the past couple of years, which is often attributed to rising interest rates. As a result of slower demand, we have seen inventory starting to build. When looking at the trend-line of months supply over the past three years we see the following unfold:
Months Supply for December by year
2023: 1.8 months
2024: 2.2 months (22.2% increase over previous year)
2025: 2.5 months (13.6% increase over previous year)
Because of the shift in supply and demand, we have a real estate market that is a bit more favorable to buyers, where buyers can place contingencies like a home inspection, or the sale of another property, into an offer without it being automatically rejected.
The third point, and the purpose of writing this, is to consider the impact of what Freddie Mac and Fannie Mae purchasing $200 billion in mortgage-backed securities will have on the real estate market.
While these two government entities purchasing mortgage-backed securities should bring down mortgage interest rates, it will likely increase the demand side of the equation. For a first time home buyer that does not have equity in another property to tap for their purchase, I understand the importance of affordable housing. Because interest is just one of the components that make up a monthly house payment, which consists of Principal, Interest, Taxes, Insurance, and possibly mortgage insurance (depending on the loan type and the amount of the down payment), lower interest rates mean the monthly payment will be lower. However, if the decrease in mortgage interest rates bring more buyers into the market, which I suspect it will do, is the reduction in the interest component of the monthly payment enough to off-set the increase in home prices that will likely happen as demand increases?
Another question to consider from more of the big picture perspective is the future role of government involvement in the real estate market. From a historical viewpoint, the government's previous attempts to "help" the real estate market by lowering interest rates, purchasing mortgage-back securities, etc, have distorted the market and lead us to the current situation. By the government purchasing $200 billion in mortgage-backed securities, will future government intervention (help) be required when the pendulum swings the other direction?
The further down the road we travel with government "helping" the real estate market, the more difficult it becomes to revert to a free market, where market operates on the economic fundamentals of supply and demand and does not require "help" from the government.
I welcome other opinions on this matter so please let me know your thoughts in the comments.
Lenders & Homebuilders Jump After Trump Unveils QE-Style $200B Mortgage Bond Buying Plan To Unfreeze Housing Market | ZeroHedge
ZeroHedge - On a long enough timeline, the survival rate for everyone drops to zero
