Home Sales Show Bernanke’s Low Rates Are Gaining Traction

For Mike and Kathryn Fry, the time was right to take advantage of the Federal Reserve’s low interest rates to buy a home.

While the couple had considered buying in recent years, they never pulled the trigger. That changed in April, when they decided on a three-bedroom, two-bathroom colonial home in Arlington, Virginia, and took out a 30-year fixed-rate mortgage at 3.75 percent.

“It was a combination of our personal finances being ready and rates being great,” said Mike Fry, 28, who works for a financial-services company. “The market seemed good, and we found a house in our price range.”

Their experience shows how Fed Chairman Ben S. Bernanke’s low interest-rate policy may finally be starting to pull housing out of a six-year tailspin, providing a boost to the broader economy. Home buyers are increasingly taking advantage of record-low borrowing costs as barriers such as falling prices and an overhang of foreclosures start to dissipate.

“The Fed is very much focused on the housing market because that’s typically the best way to channel low interest rates -- through home sales and refinancing,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York. “We are seeing some signs that the credit channel is unclogging modestly, and the Fed is going to be quite pleased with that.”

Home Sales

Sales of existing homes rose 9.6 percent in May from a year earlier, with 4.6 million homes changing hands at a seasonally adjusted annual rate, according to a June 21 report from the National Association of Realtors. A 15 percent jump in an index of contracts to buy existing homes that same month suggests the market will continue to improve.

The U.S. offers a contrast to the U.K., where the housing market is slowing amid concern over the economic outlook. Reports today showed U.K. mortgage approvals fell in May and construction shrank at the fastest rate in 2 1/2 years in June.

Stocks in the U.S. rose today after a report showing orders placed with American factories rose in May for the first time in three months, easing concern that manufacturing is faltering. The Standard & Poor’s 500 Index gained 0.6 percent to 1,374.02 at 2:57 p.m. in New York.

Fewer banks are tightening their underwriting standards, and more homeowners are taking advantage of low rates to refinance their mortgages. Companies such as Discover Financial Services are jumping into the mortgage-lending business as the industry revives.

Luxury Homes

“People have been on the sidelines now for five years,” Douglas Yearley, chief executive of Toll Brothers Inc., the largest U.S. luxury-home builder, said in a June 14 presentation. “And they need to, want to buy a house and they’re coming back out. They’re taking advantage of these great interest rates.”

That was the case for Jennifer and Ethan Ackerman, who bought a four-bedroom home in Alexandria, Virginia, in May.

“We thought we got a great interest rate five years ago with our first house at 5.25 percent, and now rates are below 4 percent, so we just thought this is a great time to buy,” said Jennifer Ackerman, 38, a director at a non-profit professional organization. “That was the real driving factor along with our family expanding and our old house being really small.”

At 1,900 square feet, their new place is twice as large as their old duplex and cost just 40 percent more. She estimated their new house would have cost $100,000 more five years ago.

Fannie, Freddie

Many banks, burned by the housing bust, remain reluctant to lend to any but the most creditworthy borrowers. Fannie Mae and Freddie Mac, which buy home loans and package them into securities with guaranteed payments to investors, require a minimum credit score of 660 for most home buyers. Fannie Mae and Freddie Mac borrowers have average credit scores of 763 and 758 respectively, according to the firms.

Banks say they may lose money if they lend to borrowers, who later default, and are forced to buy the loans back from Fannie and Freddie. The Federal Housing Finance Agency, which regulates the two government-sponsored enterprises, is working on ways to mitigate banks’ fear of the risk of repurchasing loans at a loss.

Fewer banks are tightening their underwriting standards, according to the latest annual survey of 87 banks with more than $3 billion in assets conducted by the Office of the Comptroller of the Currency.

Underwriting Standards

Ten percent of banks reported easier underwriting standards, the most since 2007, according to the survey, released last week. Twenty-five percent reported tightening standards, the least since 2007.

Standards on prime residential mortgage loans and home- equity loans were about unchanged in the Fed’s April survey of senior loan officers after tightening earlier.

The survey also indicated demand was strengthening for prime mortgage loans. And banks that said they would increase their exposure to residential real estate assets over the coming year outnumbered those that said would shrink exposure.

Discover Financial Services, led by Chief Executive Officer David Nelms, has acquired businesses to expand beyond the firm’s core credit-card operations and began offering mortgages. The company started offering them last month after buying the assets of Home Loan Center Inc. for $55.9 million.

“Home loans is a product our customers have been asking Discover for,” Nelms said in a June 19 conference call.

Monthly Payments

Low rates are also encouraging homeowners to refinance their properties, cutting monthly payments and leaving households with more to spend on other goods. The average rate on a 30-year fixed loan was 3.66 percent last week, compared with 6.8 percent in July 2006, according to Freddie Mac.

Refinancing volume in the week ended June 15 hit the highest level in three years, Mortgage Bankers Association data show. Still, that was down 27 percent from January 2009, when rates on 30-year loans fell below 6 percent.

One impediment: mortgages that are more than the value of the home after housing prices declined 33 percent from April 2006 to April 2012 on a seasonally-adjusted basis.

“The big remaining problem for the housing market is access to credit,” said Millan Mulraine, senior U.S. strategist for TD Securities in New York. “Until we can unlock that Pandora’s Box, the full impact of the low interest rates won’t be felt.”

Mulraine sees signs that process could be beginning. Home prices in the S&P/Case-Shiller index of property values in 20 cities posted 0.7 percent gains in both April and March, the best two-month stretch since 2009.

Stocks Surge

The housing recovery has fueled a 51 percent surge in the Standard & Poor’s Supercomposite Homebuilding Index this year through yesterday, compared with an 8.6 percent gain in the broader S&P 500 Index.

Housing-related industries are also seeing gains. Sherwin- Williams Co., the Cleveland-based paint company, has surged 48 percent this year through yesterday, while Home Depot Inc., the largest U.S. home-improvement retailer, rose 26 percent. USG Corp. (USG), the Chicago-based maker of Sheetrock wallboard, has soared 96 percent to a two-year high.

Bernanke and his fellow Fed policy makers are counting on housing to help spur the broader economy. They cut their key interest rate almost to zero in December 2008 and have kept it there since, while also buying $2.3 trillion of Treasuries and mortgage debt to reduce long-term borrowing costs.

Consumer Wealth

“Housing usually plays a very important role in economic recovery, both through the construction itself and related industries, but also because higher house prices increase consumer wealth and promote consumer spending,” Bernanke told reporters at a June 20 press conference.

In the 11 quarters following every recession since 1970, residential investment contributed 0.4 to 0.8 percentage point to economic growth on average, accounting for 11 to 17 percent of gains, according to a June 14 report from the Joint Center for Housing Studies of Harvard University.

Mike Fry, the first-time homeowner in Virginia, said buying a home has altered the way he and his wife think about spending and borrowing.

“It’s definitely made us change our spending habits because we have more to do around the house, like fixing the fence after the storm this weekend,” Fry said. “We’re starting to save for a renovation in a few years.”

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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