Rescue of mortgage giants obscures housing market recovery

Investors have recently received another unwelcome jolt, with the problems afflicting the two largest mortgage finance companies in the US - Freddie Mac and Fannie Mae - causing global reverberations.

The concerns about their financial health intensified to such a degree that a government rescue package for Fannie and Freddie was necessary to prevent their problems becoming a crisis, with the potential to threaten the entire global economy.

"The swift action of the Treasury and Fed has once again demonstrated the responsiveness of the authorities to stresses in the financial system," according to Cory Gilchrist, manager of the Gartmore US Opportunities Fund and the Gartmore SICAV US Opportunities Fund. "In time, this underpinning of the market could come to be viewed as a significant turning point," he continued.

While Cory concedes that the problems in the US housing market have been more painful than in recent history, he believes that there may be nascent signs of recovery. Certainly, house prices are down nearly 18% from the market's peak, according to the S&P/Case-Shiller Home Price Indices, with inventories of unsold homes at near-record levels. The fallout from this has left Fannie and Freddie financially strapped. Together, the two firms own or guarantee about $5.3 trillion (£2.7 trillion) worth of home loans - about half the outstanding mortgages in the US and equivalent to twice the size of the UK economy.

Amid the alarmist headlines, Cory believes the pessimism may have been overdone. Sales of existing homes may be showing early signs of increasing, while the plunge in prices would appear to be drawing to a close. Although there is a still a supply overhang, Cory cites Treasury Secretary Henry Paulson, who recently noted that inventories of new single-family homes are down 21% from a 2006 peak. Paulson also commented that "existing-home sales appear to have flattened over the past several months, indicating that demand may be stabilising." In Cory's view, pundits have also overlooked that house prices actually rose, albeit slightly, between March and April, in eight of the 20 markets covered by the Case-Shiller index.