After half a decade, the massive U.S. housing crisis is
Pricing and demand for homes are improving, banks are no
longer saddled with billions in sour loans, and shares of many
homebuilders are trading far up from their generational lows seen
in 2008 and 2009.
So should investors prepare for a housing boom in coming
years? If so, that would make this a great time to buy
homebuilding stocks, which have recently cooled off after
multi-year gains. Here's a look at five key stats to look for in
the housing market to give a sense of what lies ahead.
1. 9 Years And 5 Months
That's how long it has been since the average home in
the top 20 U.S. cities sold for the price it sells for
today. And adjusted for inflation, home prices are
substantially cheaper than they were back in May
Housing prices peaked in late 2006 and are off roughly
20% since then. The hardest-hit markets since September
2006: Las Vegas, Phoenix, Miami and Tampa, all of which
are still more than 35% below their peak. (Denver and
Dallas are the only major cities to see prices move
higher from that late 2006 national peak.)
Prices reached a nadir in March 2012 and
have risen roughly 20%
since then, according to the
S&P/Case-Shiller 20-City Composite Home Price
2. Ultra-low borrowing costs
According to Freddie Mac, the average 30-year mortgage
currently carries a 4.23% interest rate. That might seem
like bad news for anyone that missed out on the chance
this past spring to get a 30-year mortgage below 4%. For
buyers willing to lock in a 15-year mortgage, then the
current 3.31% rate surely appeals.
But any mortgage under 5% is still a great deal, if
history is any guide. Mortgages moved below 5% for the
first time in decades in October 2009.
Source: Freddie Mac
The average 30-year mortgage since 1971 has been 8.6%,
which means that today's 30-year mortgage is priced at
half the long-term average.
3. Falling Affordability
The plunge in home prices a few years ago, coupled
with rock-bottom mortgage rates, made homes as affordable
as at any time in recent memory. Unfortunately, the
recent rebound in home prices, coupled with a modest rise
in mortgage rates, has dented that trend.
The National Association of Realtors provides a
monthly snapshot, known as the Housing Affordability
Index, and this measure recently slumped to a five-year
The good news: home prices are still more affordable than
they were in the prior decade. The bad news: Middle class
wages continue to stagnate and probably aren't keeping up
with the rate of home price increases. If home prices
continue to rise at a strong pace, many potential
homebuyers will simply be priced out of the market.
4. 3.5 Million Reasons For
From 2000 through 2006, there were roughly 1.35
million new households formed each year, according to the
Census Bureau. Yet since 2007, that number has
remained consistently below 600,000
That means that over the past five years, a cumulative
3.5 million households that normally would have been
formed are still missing. Much of that is reflected in
the high number of millennials still living with
Demographers assume that this cohort won't stay at
home forever and will eventually create a powerful force
for housing demand. But high levels of student debt may
compel these younger buyers to opt for smaller, less
expensive homes than their parents bought.
5. 1.9 Million In Distress
According to CoreLogic, there are 1.9 million
homes in the nation's "shadow inventory." These are homes
that are either in delinquency, already in the
foreclosure process, or being held by banks and other
mortgage servicers. At some point, most of these homes
will be released back onto the market.
That figure is down about 500,000 from the summer of
2012, in part due to the fact that major investment firms
have been snapping up many of these properties in short
sales. Still, the tidal wave of foreclosures appears to
have peaked, with the number of properties
going into foreclosure
falling by a third from the summer of 2012.
The recent rebound in home prices is likely to aid the
trend, as fewer mortgages are now
. Yet a further rise in home process could paradoxically
create more headaches for homebuilders, as long-suffering
homeowners that were saddled with underwater mortgages
now look to put their homes on the market.
We can draw several clear conclusions from these
trends. First, many young would-be buyers who have been
living with their parents will eventually seek out their
own places to live. Renting a home or an apartment is a
transitional move toward homeownership.
Second, even though the housing rebound has
favored homebuilders that target affluent
buyers seeking large homes, future demographic trends
imply that future home purchases will be smaller.
Builders focused on small, low-priced homes are the best
way to play the housing market.
Third, investors should proceed with caution when
picking homebuilder stocks.
As I noted earlier this month
,analysts still expect the major homebuilders to
boost revenue from 15% to 40% in 2014, which increasingly
looks like an impossible target. The coming earnings
season could lead to a reset for those projections.
Fourth, still-low borrowing costs, coupled with solid
rental income, enable many real estate investments to
offer solid cash flow returns. That's why real estate
investment trusts (REITs) continue to be one of our
favorite asset classes.
Risks to Consider:
Interest rates have moved up only modestly, but a more
serious spike in rates (perhaps due to Washington's myriad fiscal
crises) would likely put renewed pressure on the housing
Action to Take -->
The housing market appears to have cooled off in recent months,
thanks in part to a still-slow job market and a
faster-than-expected rebound in home prices. The real estate
market may continue to see tepid sales and pricing gains for the
next few quarters, but the long-term outlook for this industry is
quite bright. As a result, any further weakness in the sector's
share prices are likely to signal an emerging value opportunity
for many investors who thought the group was starting to show too
much froth over the past few years.
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