While China’s stock market is getting slapped around, today’s Daily Reckoning focusses on a screaming opportunity. You can get in on it right now. It could run for a decade too. I’m talking about American banks.
China is grabbing the headlines. But the month of July has confirmed what we’ve been saying at Cycles, Trends and Forecasts for some time. That’s the fact that the American housing market is really moving upwards. And associated stocks are going up with it. Look now to the financiers first and foremost.
Let’s pick through some recent news to see why. The Wall Street Journal reported on US real estate on 1 July that:
‘Rents continued a steep upward push across the country, with some of the most expensive cities in the U.S. continuing to see some of the biggest increases.’
This is especially true in cities where workers in the booming US technology sector live like San Francisco, San Jose and Denver. The land market is capturing the higher wages that the tech gains are driving.
Markets like those have seen rent increases between 5% and 8% from the second quarter of 2014. The rising rents capitalise into higher real estate prices.
You’ve probably already guessed the obvious conclusion. Anyone wanting to buy has to take out a bigger mortgage if they need financing. In fact, it’s already happening and putting pressure on the market.
The US Federal Housing Finance Agency (FHFA) let it be known this month that ‘baseline jumbo thresholds may be raised for the first time in a decade.’
Let’s pause there for a moment so you can see broadly what’s happening in the US mortgage market, as I understand it.
When a bank or lender makes a mortgage loan to a homebuyer in the US, it can sell that loan to the government-sponsored firms called Freddie Mac and Fannie Mae.
Loans eligible to be sold to Freddie or Fannie are called ‘conforming’ loans. The banks on-sell the loans because it frees them up to write even more mortgages.
The FHFA, however, sets conforming loan guidelines. A crucial one is the size of the loan. Basically, these guidelines put limits on the loans that Freddie and Fannie can buy.
If the size of the mortgage loan goes above this limit, it’s then classified as a ‘jumbo’ loan. Those usually carry a slightly higher interest rate and the borrower requires a higher credit score.
However, according to the WSJ, there is some regulatory ‘wiggle room’ where conforming loans can exceed their baseline cap and still qualify to go to Fannie and Freddie.
In January of this year, in order to keep up with rapidly rising home prices, FHFA raised this cap in 46 counties nationwide. 46 counties is the largest number since 2012.
Even so, in the first six months of the year, the number of jumbo loans has risen 36% up on the same time period in 2014, according to Inside Mortgage Finance. Jumbo loans are now running at 20% of all mortgage originations. That’s back at their pre-recession levels.
Not only that, the Wall Street Journal reported all-cash sales have dropped from 32% of inventory of existing home sales to 24% compared to the same period a year ago.
That cash figure seems quite high. If correct, it indicates there’s a lot of room for the US housing market to move higher once credit financing really kicks into gear.
All this is driving (and will continue to drive) credit into the US housing market and push real estate prices higher. That will, of course, benefit the banks. They profit from the bigger mortgages and renter demand for housing.
You can see it already in action with Wells Fargo [NYSE:WFC], one of America’s big four banks and its largest mortgage lender. It recently bought back 36 million shares and increased its dividend by 7%. The stock traded at a 52 week high this month.
But WFC isn’t alone. And there’s plenty of potential housing and mortgage demand out there as you can see by looking at the chart below.
The ‘Great Recession’ knocked the stuffing out of the US housing market so badly that the home ownership rate has fallen back to where it was when former President Bill Clinton initiated his ‘National Homeownership Strategy’ in 1995.
The WSJ reported in June on its 20th anniversary. Looking back, the paper said:
‘That set in motion an effort by both parties in Washington to work with the private sector to loosen lending standards and make it easier for middle-class Americans with less savings or inherited wealth to purchase homes.’
That worked out well in the end, didn’t it?
What’s amazing is there are now rumbles coming out of Washington for the government to ‘do’ something to get more Americans back onto the property ladder. Again.
No doubt banking interests duly lobby these calls, keen to see as many debt serfs as possible brought on to the ‘American Dream’. It will be very profitable for some time. And around in circles we go.
Get the rest of what you need to know here to make the most of the opportunity. History repeats. You can profit from that, if you bother to look and see why.
For The Daily Reckoning, Australia