Key highlights from October 2014's home price report (Part 2 of 3)
Home prices are approaching peak levels
A 4.5% year-over-year gain puts the Federal Housing Finance Agency (or FHFA) House Price Index (or HPI) back at August 2005 levels. The rate of price appreciation appears to be slowing. While most indices showed the housing market bottoming out around February 2012, the FHFA showed it bottoming out around May 2011.
Perhaps distressed sales dominated at the end of 2011. This pushed the other indices lower. As you can see from the chart, prices are within ~5% of their prior peak.
The theme of the real estate market for the past year has been tight inventory. This theme was also 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. This reduction shows that the easy money has been made in the distressed-to-rental trade.
Another economic challenge is the lack of labor mobility. Some places in the country are looking for workers. Other places have too many workers. Unfortunately, workers can’t move easily if they’re underwater homeowners. This has depressed the labor force participation rate. When these people regain home equity, they’ll sell their homes and move to where the jobs are. This will be a big stimulant for the economy.
Implications for mortgage REITs
Real estate prices are big drivers of non-agency real estate investment trusts (or REITs), including CYS Investments Inc. (CYS), Newcastle Investment Corp. (NCT), and Redwood Trust, Inc. (RWT). Prices aren’t as important for agency REITs such as Annaly Capital Management, Inc. (NLY), and American Capital Agency Corp. (AGNC).
In fact, increases in real estate prices can be a positive for non-agency REITs. They can be negative for agency REITS. When prices rise, delinquencies drop. This trend is important because non-agency REITs face credit risk. For agency REITs that invest in government mortgages, rising real estate prices can drive prepayments. This has a negative effect on their returns.
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