After a four-month uphill charge in the second half of last year, many mortgage-related stocks appear to have paused, as if waiting for the economy to show its intentions before continuing their upward march or retreating to lower ground.
Considered countercyclical and safe investment havens during downturns in the broader economy, mortgage stocks began moving up in August and passed many technology and other financial services stocks heading the other direction.
Fannie Mae soared 66% from September to December, to $87.813, but has leveled off at around $80 for most of this year. Fannie traded at $78.87 late Thursday.
Freddie Mac took a similar ride. From its 12-month low of $38.939 on Sept. 1, its stock surged 77%, to $69 in late December. Since then it has hovered around $64, trading at $64.22 late Thursday.
Countrywide Credit Industries Inc. was the focus of investor angst early last year because of its stagnant share price, but takeover rumors and lower mortgage rates helped its stock jump 88%, from $27 last May to $51 in December. In the first four months of this year its shares have bounced between $42 and $47, trading around $42.58 late Thursday.
And stocks in other areas of the sector thrifts such as Golden West Bancorp and Washington Mutual Inc. and mortgage insurance companies such as Radian Group and MGIC gained 50%, and in some cases 100%, from last years lows.
Where these stocks will go next is anybodys guess. The mortgage market, fueled by a refinance boom and a strong purchase market, showed unexpected strength in the first quarter, yet the industrys stock prices have remained stalled. And that magic could quickly disappear if mortgage rates, which have held steady around 7% for the last four months, increase even just 50 basis points.
Observers say many will be tempted to take their gains and run before the business fades a move embraced by billionaire investor Warren Buffett, who sold his Fannie and Freddie holdings last year but some cautioned that the stocks still have an upside and will only go up in the long term.
A lot of investors want to leave the sector, but I dont think they should, said Thomas ODonnell, an analyst at Salomon Smith Barney. He is advising clients to hang on to the large stocks, such as Fannie, Freddie, Wamu, and Golden West. The mortgage insurer stocks also still have room to grow, he said.
Chris Blum, an analyst with Edward Jones & Co., a St. Louis investment brokerage house, agreed with his assessment of the industry. From a longer-term perspective, Fannie and Countrywide in particular should fare well no matter where the economy goes, he said.
Both of these companies are leaders in what they do, and they are both materially off their highs, he said. Even though there is still some question whether mortgage rates will rise or fall, or whether we will see a surge in refinance activity, they are positioned to continue to do well with their business.
Nonetheless, many observers predict that the current deluge of mortgage business will subside in the second half, which could remove some of the investor enthusiasm from the sector.
Currently the mortgage is in a sweet spot, said Michael Grondahl of U.S. Bancorp Piper Jaffray. Everything is going well. People need to be aware that as we work through the summer, we are going to trend out of that sweet spot.
Richard Eckert, an analyst with Sutro & Co., agreed with his forecast. The predictions for record originations this year are exaggerated, and I dont think this refi boom is going to be as big as originally projected. he said.
The 1998 refinance boom gave many borrowers the opportunity to refinance at historically low rates, and so far mortgage rates have not fallen to those levels, Mr. Eckert said.
The fall of 1998 was the absolute low in the last 30 years, and its unlikely well hit them again this year, he said. In the first and second quarters weve plucked off the low-hanging fruit the adjustable rate mortgages, the high-coupon loans originated in 1999 and 2000, and some subprime graduates but now whats left?
Mr. Grondahl said that by the fall rates might creep back up and end whatever is left of the refinance wave. The purchase market is very strongly summer-oriented, so by the fall small headwinds could take the mortgage business out of its current nirvana, he said.
These stocks are going to have fantastic June quarters and very good September quarters, Mr. Grondahl said. After that they will revert back to the norm, and the quarters will be closer to average decent instead of great, he said.
Be aware of that, Mr. Grondahl said. The fundamentals remain great today, but those fundamentals will moderate this fall.