Are Fannie Mae and Freddie Mac Poised to Jump on Strong Housing Trends?

In this segment from Market Foolery, the team reaches into the mailbag to tackle a question from a German listener. Axel wants to know whether signs of strength in the U.S. housing market could makeFannie Mae(NASDAQOTH: FNMA) and Freddie Mac(NASDAQOTH: FMCC) attractive investment opportunities. Tune in to learn more.

A full transcript follows the video.

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This video was recorded on May 15, 2017.

Chris Hill: Email fromAxel Brucknerin Germany: "Iheard you speaking recently about good indicators for a strong U.S.housing market in the future, soI'm curious how you would evaluateFannie MaeandFreddie Mac. The upside for these stocks seemstremendous compared to the risk." What do you think, Jason?

Jason Moser:I wouldactually probably beg to differ there.I guess, maybe, he's thinkingupside compared to risk, and risk meaning that these arecompanies that are more or less underwritten by the U.S. government. So, yeah,from that perspective, the risk is, generally speaking,probably pretty low. But I thinkunderstanding what these companies do, they make their money from, essentially, fees and net interestmargins, so they're more or less like a bank. But they're not stocks that trade on any underlying businessfundamentals. I think they tend to trade more on who's in office, and whatcourt ruling recently wentin their favor or in someone else's favor.

So to me, they're not reallybusinesses as much as they are necessaryentities, and we're trying to figure out where they fit in our housing market going forward. Because clearly,something went wrong not too terribly long ago. I thinkwhen we look at housing in general, the housing opportunity for investors is absolutely a must in the portfolio. You look at that as one of the biggerpicture plays that you need to havein your portfolio one way or another. I would not look at one of these twobusinesses as a way to do that.I think if you're concerned with one of these businesses,I don't know why you wouldn't just pick a big bank,because then at least you have a bank that'sgoing to be based on profits, and you'regoing to see dividends, and stocks that tradea bit more on fundamentals. But I think the opportunity is there. If you look at home ownership rate here,going back to 2005, right about when it peaked,it's been on a pretty steady decline since then.

Taylor Muckerman:Slow, yeah.

Moser:Yeah,it's reverted all the way back tobelow where it was in 1995. So,I think there are plenty of opportunities. I thinkthis notion that millennials are not buying houses is misguided. There is data to prove that they are. They'recertainly being a bit more particular, a bit moreconsiderate when buying houses. But ownership is one of those things where, yeah, at 20 years old,you're like, "No, I'mnot going to buy a house, of course not,I'll tell you I'm not going to buy a house," butthen life happens. When you hit 25 to 30 years old, things change. You don't mean for them to change, they just do.

Hill:Andthat's also one of those narratives that's now four or five years old. There arestories that I've seen online that speak to that, they're parroting that same line, and you read them and think, "I think you'rebeing kind of lazy."

Moser:Whatdo you mean, the line that millennials aren't buying homes?

Hill:Yeah, like"That was the case five years agoand the data proved it, thereforeI'm going to just repeat that line." Maybe it's time for some updated data.

Moser:Right. If millennials aren't buying homes, you need toprepare for a home ownership rate more like 40%,and I'm just telling you, that's not going to happen.

Muckerman:Yeah. They'renot getting the opportunity. It's not that they don't want to. A lot of new home builds are generally being priced mid-market to high-market now. They'renot really getting entry levelprices to buy their first house. So they probably want to, but it's a little bit more difficult for them to,because I think new builds are stillpre-recession levels. It's on anuphill slope right now. We're still far, far behind in terms ofopportunities to buy a brand new house for these folks. And some of the hotter cities where you're seeing millennials move, they're priced out of the market, andit's become a rental societyin a lot of these cities, with banks, afterthe recession, buying upa lot of the inventory and renting it out, and not offering these used homes for sale. Andif you're not building new homes, you'restuck in limbo there.

Moser:Yeah,and the economics dictate it. It'sall about supply and demand,just like any other market.I was reading about this, I think it was in Minnesota, of all places, you're seeing homes that are going on markets that, they don't last but a couple of days on the market before they're gone. Speaking from recently selling a townhouse of ours inFairfax here, which is apretty good sort of entry level pricefor this area, and I mean, this is an area where housing is a bit more expensive, our house was gone in less than a weekend,because the price was attractive. So you're seeing, in areas where Millennials or first-time home buyers have thatopportunity, they'redefinitely jumping in there. And wherethere is lower supply, those home builders aregoing to come in and start building more for those types of buyers. So youlook at all of the different ways you canparticipate in that market, and it'sanywhere from retail, like Home Depot, tosomething likeEllie Mae, whichI've talked about a million times on our shows,taking a part of every loan that goes on out there, or something like a big bank whereyou can get that dividend in --

Muckerman:Timber companies, nicediversifier,softwood lumber.

Moser:Yeah, material suppliers. I look atsomething like Freddie Mac or Fannie Mae,and I think, well ...

Muckerman:There'sbetter options out there.

Moser:Way,way better options.

Hill:I do, however, like how Axel is thinking about it, just interms of the upside relative to the risk. Regardless of whatever stock you're looking at, that's a greatexercise to go through.

Moser:No question.

Chris Hill has no position in any stocks mentioned. Jason Moser owns shares of Ellie Mae. Taylor Muckerman owns shares of Home Depot. The Motley Fool owns shares of and recommends Ellie Mae. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.