If you are in doubt about a recovery in housing, some economic facts may sway you into believing that at least a sputtering recovery may be happening.
Due to a strong increase in mortgage loans, both JP Morgan Chase and Wells Fargo, recorded significant profits in the last quarter, July – September.
Wells Fargo generated $139 billion in mortgages for the quarter, an increase from a year earlier of $50 billion. Wells Fargo is the nation’s largest mortgage lender with a portfolio three times the size of its nearest competitor.
Each bank stated double digit increases in earnings as a small growth in housing sales begins to take hold.
The current environment of historically low interest rates, quantitative easing by the Federal Reserve* and an overnight fed funds rate of zero have certainly contributed to the turnaround.*
In September, the Fed announced it would start buying $40 billion of mortgage bonds per month. This statement has helped drop interest rates and spurred a wave of new buying.* Seeing that the economic situation is changing, the Federal Reserve is doing what it can to push the recovery further.
- Quantitative easing is aimed at reducing interest rates through the Fed buying Treasury bonds in the open market. The influx of cash to financial institutions increases reserves that compel them to lend out the money, thus more supply and hence a lowering of interest rates.
- The overnight rate for banks to borrow from the Fed is now zero, this means banks may utilize funds for their operations at no interest. The general interest rate for loans goes up or down depending on the base level set by the overnight rate. So today, general interest rates are quite low, abnormally low. The average 30-year fixed rate loan is currently at 3.39 %. Last year at this time, the average rate was at 4.12%
- The buying of mortgage backed securities from Fannie Mae and Freddie Mac, like quantitative easing should put more cash into the market. The idea is that investors having sold their holdings to the Fed might now take their cash and invest in housing or buying foreclosed properties, and this would increase prices of homes in the market, returning health to the industry, and increasing mortgage loans and the health of banks.