Daily Economic Update: Fannie and Freddie Downgrade

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights Standard & Poor's downgrade of Fannie Mae and Freddie Mac.

• Fannie and Freddie have been downgraded today after the U.S. government was tarnished over the weekend with a less than stellar credit rating.
• Given that Fannie and Freddie are effectively nationalized with implicit government backing, it is common sense that the ‘offspring’ would also get the same mark down as the ‘parent’ (the government in this case).  FHA loans have explicit (not implicit) government backing so FHA mortgage rates will move directly in proportion to the U.S. government borrowing rate.
• The spread between Fannie and Freddie bonds with the U.S. Treasury has opened up because of implicit and not explicit backing.  Still, the fall in the Treasury interest rates is large enough that even Fannie and Freddie backed loans will get lower rates despite the widening spread.
• The heavy hit was not to borrowing costs, but to the stock market.  A hit to consumer confidence from the downgrade will slow consumer spending growth or even cause an outright contraction.  That will hold back economic growth and corporate profits.
• The stock market equity had been $19.5 trillion in spring of this year.  Today, the value is $16.8 trillion, a loss of nearly $3 trillion.  Consumers will be more hesitant than before.  We may possibly see $150 billion less in consumer spending during upcoming quarters, unless there is a meaningful rebound in stock prices.
• Oil prices have been falling as well.  Lower oil prices tend to boost consumer spending, as less money is spent at the gas pump making more money available for other items.
• Going the other direction: gold, now at above $1700 per ounce.  On the expectation of slow economic growth, the Federal Reserve might return to printing money again.  One way to protect against too much printed money and currency depreciation is to hold onto hard assets that hold value.  Gold and real estate have traditionally served as a good hedge against inflation.  This time around, only gold is rising while real estate is not.