Shares of homebuilders, D.R. Horton, Inc. (DHI), Lennar Corp. (LEN), KB Home (KBH) and PulteGroup, Inc. (PHM) rose around 5% on Jan 7, amid reports that President Obama plans to cut premiums on mortgage insurance to encourage home buying among first-time homebuyers.
It is expected that Obama will announce a 50-basis-point cut in the Federal Housing Administration’s (FHA) annual mortgage insurance premiums from 1.35% to 0.85% at an event in Phoenix on Thursday.
The FHA is a government agency that insures loans made by banks and other private lenders for home building. Borrowers must pay a fee to the FHA to guarantee mortgages.
Economic growth, improving job scenario, growing consumer confidence, moderating home prices and low level of housing inventory resulted in an improvement in the housing market in the second half of 2014, though at a slow pace.
However, despite moderate improvement in economic growth, the lending environment is still overly restricted for first-time homebuyers. High down payments and strict underwriting standards restrict the access to mortgage markets.
Lowering the cost of mortgage insurance will widen mortgage access and make home ownership more affordable for homebuyers who face tighter mortgage standards. The possibility of an increase in home demand pulled up share prices of the homebuilders.
The market generally believes that homebuilding activity will pick up in 2015 backed by improving job numbers and a rebounding economy.
Worries still persist in the form of a possible rise in interest/mortgage rates in 2015 with the Federal Reserve closing the ‘quantitative easing’ program in October. Higher interest/mortgage interest rates may moderate housing demand and pricing.
Nevertheless, there are plenty of reasons to be optimistic about the broader housing sector over the short as well as the long term — the latest being the cut in FHA mortgage insurance premiums.
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