Before I begin, allow me to reiterate that I’m fully aware this is a real estate blog and that many of the thousands of readers who visit these pages every day never, ever think about the stock market or the broader economy and its impact on your real estate investment profits.
But some events deserve special attention, and one of those happened today. Fannie Mae, the largest mortgage company in the United States, announced a loss in the second quarter of this year that was nearly three times larger than expected.
It’s a very common experience to hear about companies reporting their profits and losses each quarter. So why is this announcement different or more significant than most?
It’s all in the way the stock market reacts to it. Recall that earlier this week, I said that if the stock market was able to ignore a bad announcement from Fannie Mae, that is a solid sign that “smart money” (meaning mega money managers) think the worst is over for the credit crisis, and that the bad news has already been factored in to the stock market.
So what’s happening in the stock market? As of this moment at 10:38 AM, the Dow Jones Industrial Average is up by about 180 points, or 1.5%. That’s a pretty huge response. But the important thing to remember is that just about 3 weeks ago, this same stock market fell apart hard at the news of the potential impending collapse of Fannie Mae and Freddie Mac. So if the stock market closes today with anything other than a big sell-off, that’s a very positive sign.
Now that there is some hard data out about exactly what’s happening, there seems to be a collective acceptance that’s calmed the stock market.
By extension, the significance of the muted reaction to massive losses at Fannie Mae is that there’s one more bit of evidence that some people “in the know” think that the housing market downturn has run out of steam. And when one factors in the emergence of several Distressed Debt Funds, there is significant evidence of Wall Street’s expectations for a slowing (and possible reversal) of the real estate market doldrums.
Now that you know how Fannie & Freddie’s earnings results currently correlate to the perceived condition of the real estate market, I advise you to go out and find some good investment property to purchase. It won’t be long and you’ll be very glad you did so!
Thank you for reading FreeRealEstateTraining.com!
Teaser Video - Bryan Ellis on Fannie Mae’s Earnings Disappointment
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I’m just not feelin’ the love as you are.
Freddie’s Home Price Forecast Darkens
Freddie Mac officials on Wednesday [8/6] said home price declines could be 25% worse than it had forecast just a few months ago. During the company’s second-quarter earnings conference call, company chairman and chief executive Richard Syron said home values will fall 18% to 20% from “peak to trough,” compared with a previous estimate of 15%. Mr. Syron added that, “We are now halfway through the peak-to-trough” declines. In tandem with its earnings, the government-sponsored enterprise said “default costs” on its $791 billion portfolio could range from a low of $16 billion to a high of $42 billion. During the conference call, Freddie chief financial officer Buddy Piszel said 90% of the “marks” the GSE is taking “will flow back to us.” (Freddie took a $2.5 billion provision for credit losses in the second quarter, compared with $1.2 billion in the first quarter.) Freddie Mac’s revenues increased 11% in the quarter to $1.7 billion, compared with those of the first quarter. Mr. Syron told analysts that the GSE “does not expect to draw upon” any of the federal borrowing permitted under the housing bailout bill recently signed by President Bush. Freddie Mac can be found online at http://www.freddiemac.com.
And so despite the fact that all of this news is out and publicly available to everyone, you think there’s no significance to the lack of negative response to this news on Wall Street? Curious…. — Bryan Ellis
I don’t see how Wall Street yawning at Freddie/Fannie’s problems negates the 10-month supply of houses…
Nobody said anything of the sort. What were you reading? — Bryan Ellis
and the fact that a new wave of defaults is looming.
The NY Times reports today (8/5) that although the “first wave of Americans to default on their home mortgages appears to be cresting,” a second, far larger group of potential loan defaults is looming, because now, even “homeowners with good credit are falling behind on their payments in growing numbers.” The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
Yes, we’ve all heard about the impending “Alt-A” doom and gloom scenario. And who knows - it may just happen. But I’ve got to tell you - those who focus only on the “bad possibilities” and not the “positive indicators” get exactly what they want: Fodder for complaints, but little else. — Bryan Ellis
Wall Street has often proven to be quite lethargic, not astute.
True. But it does tend to be a good leading indicator - and those who are actually investors tend to be interested in such things. — Bryan Ellis
Actually, the nation’s housing supply is over 10 months and is expected to reach 12 months by the end of July.
http://calculatedrisk.blogspot.com/2008/05/historical-housing-graphs-months-of.html
Bryan, looks like I serve as ballast on this blog.
Not sure if ballast is the right description for you, but you’re certainly on the other side of many of my arguments. Thanks for your comments! — Bryan Ellis
An investor friend with 14 rental houses is complaining (for about the last six months) that the credit crisis is still here. He is having trouble refinancing his 14 houses, even though he is an eye doctor with very good income and credit. I suggested trying a commercial lender and get a blanket mortgage on his properties with partial releases so he can sell them individually.
Another complaint is that home buyers with very good credit are getting declined after waiting three months for a loan commitment. Home sales are failing mostly because of the lack of financing.
As far as what Wall Street is thinking, who knows? Russia just invaded Georgia, thousands are dead and Georgia has a vital oil pipeline that western countries (like the USA) need. Wall Street never blinked once and rose about 300 points on that day.
Maybe it’s just another dead cat bounce?
Sure, that’s possible. Why would one be inclined to come to that conclusion? — Bryan Ellis
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