Shrinking Housing Inventory Favors Short-Term Recovery

Several numbers favor a real estate recovery in the short-term, such as the shrinking supply of new and existing homes on the market. However, the long-term is much …

Several numbers favor a real estate recovery in the short-term, such as the shrinking supply of new and existing homes on the market. However, the long-term is much less certain with major threats such as foreclosures and unemployment obfuscating the outlook. For more on this, see the following article from The Street.

There are plenty of signs that the housing market can sustain a short-term recovery, even though the sector has lost some of its momentum and will continue to feel the effects of the weak labor market.

First, the government’s incentives to attract first-time homebuyers has been a success. The $8,000 tax credit, which is part of the $787 billion federal stimulus package, has pushed many creditworthy people over the “buying hump” and toward home ownership. This government subsidy is expected to expire at the end of November but likely will continue to keep real estate attractive until then.

Second, the inventory of new homes is starting to diminish. In absolute terms, the total number of new homes on the market is at a 27-year low of 262,000, vs. 548,000 in April 2007. In terms of months of supply, new-home inventory, which was once as high as 12.4 months, now stands at 7.3 months.

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Third, there seems to be a healthy correction in the inventory of existing homes. This number now stands at 3.6 million homes. On a monthly basis, that’s 8.5 months of supply, which is much lower than the 11-month level it once stood at.

Lastly, mortgage rates are becoming very attractive. Homebuyers can get 30-year fixed-rate mortgages with rates of less than 5%, which makes buying homes more affordable. It is also prompting people to refinance existing mortgages.

These factors support a short-term recovery, but investors should continue to consider other, negative trends such as increasing unemployment, elevated foreclosures and a consumer who is unwilling to take on big purchases.

From an investor’s perspective, two securities are worth considering:

The iShares Dow Jones US Real Estate(IYR Quote), which closed at $41.55 on Monday, up 87% from its March low of $22.21.

The SPDR S&P Homebuilders(XHB Quote), which closed at $14.50 on Monday, an increase of 76% from its March low of $8.23.

When investing in equities, it is imperative to keep in mind the inherent risks that are involved. To help mitigate these risks, an exit strategy is vital. According to the latest data at www.SmartStops.net, an uptrend in the aforementioned exchange-traded funds could come to an end at the following price points: IYR at $39.10 and XHB at $13.95. These price levels change on a daily basis with market volatility, and updated data can be found at www.SmartStops.net.

This article has been republished from The Street. You can also view this article at
The Street, an investment news and analysis site.

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