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Can the Housing Market Rebound?

SAN DIEGO (ETFguide.com) - It's been three long years since the housing market exhibited any signs of health. And now, after massive government intervention with artificially low interest rates, special tax credits and other stimulus plans the housing market is faced with the same question as before: Can home prices rebound?

Low Rates are Nice but Not Helping

The media has spent a lot of energy lately reminding us about how mortgage rates are at 60 year lows. Generally, the interest rates on mortgages move in lockstep with yields of long-term U.S. Treasuries (NYSEArca: TLT). Freddie Mac reports interest rates for 30-year fixed rate mortgages average around 4.5 percent. But even lower borrowing costs have their limited benefits.

Lower rates, for instance, cannot help homeowners who aren't able to refinance from higher rates to lower ones because of poor credit or overly restrictive lending standards. It's become increasingly evident that low interest rates cannot fully resolve the problem of overpaying and over-borrowing on real estate.

Despite the Federal Reserve's plan to keep borrowing rates low about one-third of all mortgages are still underwater. Homes are considered underwater when the mortgage exceeds the market value of the property. What do you think will happen to property prices when interest rates start heading up? It won't be pretty.

Good Investment Turned Bad?

For many years, buying a house was touted to be the best investment a person could make. Beyond just being a place of shelter, your home could always be counted on, especially when all other investments, including the stock market, faltered. But instead of becoming a source of stability, houses have become a leading reason of financial anguish for millions.

During the second quarter, 21.5% of single family homes had negative equity according to Zillow Real Estate Market Reports. To add insult to injury, Q2 2010 was the 14th consecutive quarter to report annual declines in home prices. And more downside is still probably ahead.

'There could be a couple of additional months of slow home-sales activity before picking up later in the year, provided the job market continues to improve,' said Lawrence Yun, chief economist at the National Association of Realtors. 'Over the short term, inventory will look high relative to home sales. However, since home prices have come down to fundamentally justifiable levels, there isn't likely to be any meaningful change to national home values.'

A Thing Called Jobs

People that don't work don't have income. (Yes, unemployment checks count as income, but they're temporary and usually not adequate to cover expenses.) And people without income usually don't make major purchases, like buying a home. So from this perspective, the ailing job market is having a negative impact on the housing market.

July's headline nationwide jobless rate of 9.5% is badly understated because it omits a lot of pertinent details. If we count college graduates unable to obtain work along with self-employed unemployed workers and underemployment, the jobless rate is easily above 20%.

Is this the type of environment where home prices can thrive in?

Conclusion

Curiously, the performance of mortgage and real estate stocks has been up. So far this year, the iShares FTSE NAREIT Residential Index Fund (NYSEArca: REZ), SPDR S&P Homebuilders ETF (NYSEArca: XHB) and iShares FTSE NAREIT Mortgage REITs Index Fund (NYSEArca: REM) are alloutperforming broader stock market benchmarks.

Does it prove the housing market is on the mend? Does it mean low mortgage rates are helping residential real estate? Is the worst over?

The ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast. This includes a target-range for the ultimate market bottom based on historically indisputable evidence.

In summary, the discrepancy in performance between mortgage/real estate stocks and the depressed housing market shows a Grand Canyon separation between reality and fantasy. Hollywood isn't the only place with artificial effects. Just look at real estate .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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