With the Federal Reserve System buying half a trillion dollars worth of Fannie Mae and Freddy Mac IOUs a year, the mortgage market is flooded with newly created money.
Lenders are now offering 3% down payment mortgages. Why, it’s 2006, back from the grave.
This has breathed new life into the housing market. This does not include millions of homes in the shadow inventory that lenders refuse to foreclose on. The original owners occupy these homes, rent-free. Why pay rent? No need. Just pay property taxes.
This is not a bubble, but it is a subsidized recovery. As long as Bernanke & Company want to create money out of nothing to subsidize housing, the market will move upward.
As soon as the FED stops buying IOUs from the government-owned mortgage companies, the market will move back down, but not in every region. The FED shows no sign of stopping its purchases.
In the first quarter of 2012, loans with between 3 and 10 percent down payment made up 15 percent of Fannie Mae’s business for home purchase loans (not refinances). In the second quarter it rose to 17 percent and in the third to 18 percent. Fannie Mae has not reported its fourth quarter yet, but that share is expected to rise again. While a credit thaw is part of it, as mortgage interest rates rise and fewer borrowers apply to refinance, lenders are simply looking for more business.
There is a problem here: the number of mortgage applications has remained flat for three years. So, the recovery is nowhere near a bubble. Not enough people can qualify for loans. The rates are great, but only if you qualify.
The time to buy an income-producing rental home is sooner rather than later. But don’t pay retail. Shop.