While the real estate market faces a tough uphill battle, there are some signs that suggest a more optimistic future. Home prices are at record lows when measured against disposable income, 30-year mortgage rates fell as low as 4.25%, and existing home sales were better than expected going into the traditionally strong summer season. See the following article from The Street for more on this.
Although the real estate market faces stiff headwinds in the form of an elevated unemployment rate, weak consumer sentiment and a hoard of mortgage defaults, there are some indications that things may change.
One positive force for real estate market is affordability. With the market being depressed so long, prices are at record lows on a per-capita disposable income basis.
In fact, when adjusted for inflation, organic income growth is on the rise and is expected to continue to increase as businesses expand and the overall economy improves.
Enhancing affordability are mortgage rates, which are at record lows. According to BankRate.com, as of Wednesday, a 30-year fixed mortgage was at 4.25% and jumbo loan rates were at their lowest levels in nearly five years.
These highly attractive lending rates have sent the volume of mortgage applications up 7.6% during the week ended July 16 and have enabled the number of purchase applications to increase, despite the expiration of the federal homebuyer tax break.
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In addition to affordability, seasonality is favorable for the housing market. Historically speaking, May-August is a seasonally strong period for home sales, and it appears that trend is still intact. The Case-Shiller index increased more than expected in May and posted a rise of 0.47% month over month and 4.4% year over year on a seasonally adjusted basis.
A third force working in favor of the real estate sector is an improving labor market. According to the Labor Department, 39 states and the District of Columbia posted unemployment rate decreases in June, marking a third straight month of declines and pushing the national unemployment rate to 9.5%.
Lastly, the sector as a whole seems to be trending in the right direction. Existing-home sales were higher than expected in June, new-home sales rose a healthy 23.6% month over month in June and inventory-to-sales ratios are improving with nearly 8.6 months of inventory on the market.
In conclusion, as long as lending rates remain favorable, inflation-adjusted disposable incomes rise and the labor market continue to improve, an opportunity seems to exist in the real estate sector.
Some ways to play the residential real estate market include:
SPDR S&P Homebuilders(XHB), which closed at $14.84 on Wednesday.
iShares Dow Jones US Home Construction(ITB), which closed at $11.51 on Wednesday.
iShares FTSE NAREIT Residential Plus Capped Index Fund(REZ), which closed at $36.88 on Wednesday and is currently trading above both its 50-day and 200-day moving averages.
Although the sector seems to be trending in the right direction, it is important to use an exit strategy that identifies specific price points at which downward price pressures are likely.
According to the latest data at www.SmartStops.net, the price points for the aforementioned ETFs are: XHB at $14.20; ITB at $11.00; REZ at $34.92. These price points are reflective of market volatility and change on a daily basis.
This article by Kevin Grewal has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.