Low Interest Rates Could Drive Housing And Dividend ETF Plays

As the housing market continues to remain hot, with refinancing and new purchasing gaining traction amid historically low interest rates, lenders are scoring serious profits, while housing and dividend ETFs are benefitting as well.

Independent mortgage banks and mortgage subsidiaries of chartered banks announced they achieved a net gain of $4,548 on each loan they originated in the second quarter of 2020, which represents a reported gain of $1,600 per loan in the first quarter of 2020, according to the Mortgage Bankers Association.

“Fueled by a surge in borrower demand and record-low mortgage rates, mortgage production profits in the second quarter reached the highest level since the inception of MBA’s report in 2008,” said Marina Walsh, MBA’s vice president of industry analysis. “Production volume averaged over $1 billion per company, and there was an ideal combination of higher revenues and lower costs.”

Revenues climbed over a half a percent from the first quarter, while expenses improved by $844 per loan, as  productivity rocketed to hit levels not seen in eight years.

These conditions, along with continued low mortgage rates is likely improving the mortgage lenders’ profit margin projections for the next several months, according to Fannie Mae’s Q3 2020 Mortgage Lender Sentiment Survey. Mortgage rates also scored another fresh record low last week, according to Freddie Mac.

Nearly half of lenders feel that profit margins will gain basis the prior quarter, with just over a third claiming it would remain the same and only 15% saying profits will decline.

“This quarter’s MLSS results align with the strong housing recovery amid the larger economic downturn due to COVID-19,” said Doug Duncan, Fannie Mae’s chief economist. “Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey’s inception. Pent-up consumer demand, continued low mortgage rates, and favorable mortgage spreads helped drive lender profitability.”

Lenders saw robust consumer demand across all loan types including both purchase originations and refinances. Many lenders are scrambling to higher new loan officers as they are unable to keep up with demand for loans. In addition, lenders did announce tightening of credit standards over the last three months, as a result of lingering economic weakness due to the coronavirus pandemic, but anticipate they will remain stable, as the Fed has expressed uncertainty going forward.

“Although the housing market is showing remarkable strength amid the economic and health crisis, potential longer-term downside risks remain, including labor market weakness, low inventory, and home price uncertainty,” added Duncan.

For investors using ETFs, this means that rates may remain low and other vehicles like higher dividend paying stocks like the WisdomTree U.S. MidCap Dividend Fund (NYSEArca: DON) or the ALPS Sector Dividend Dogs ETF (SDOG) may make sense for the time being.

Meanwhile, if the housing market remains hot, the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) and Hoya Capital Housing ETF (HOMZ) should continue to benefit from housing investment.

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