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U.S. Housing Market Investing

Vanishing Inventory Spurs Construction

Written by Briton Ryle
Posted May 16, 2013

Nothing draws people to a sale more than the sight of throngs of other people rushing toward it. “Hurry for the best selection!” and “Time is running out!” incite the typical ads with hundreds of shoppers bursting through the doors.

house in hand 600x398The housing market in the U.S. is experiencing just that, as buyers are finally beginning to notice the fantastic clearance sale on homes across the nation. The National Association of Home Builders/Wells Fargo Housing Market index rose from an overall reading of 41 in April to 44 this month, where a rising number means increasing home buying sentiment.

We may still be in the early stage of the nationwide housing sale, but time and inventories may be running out.

Sense of Empowerment

Breaking down the NAHB index into its three component parts, we see that May showed a rise in buyer exigency. Home viewing traffic rose to a rating of 33, current single-family home sales rose to 48, while future home sales expectations rose to 53.

NAHB Chairman Rick Judson, a home builder from Charlotte, N.C., expressed his confidence to CNBC:

“Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies...This is definitely an encouraging sign even amidst rising challenges with regard to the cost and availability of building materials, lots and labor.”

As Judson observed, inventory is thinning and home builders are having to ramp up their construction to replace it. 780,000 new homes were started in 2012, an increase of 28% over 2011’s housing starts and the most in a single year since 2009.

Putting the hop into buyers’ quickening steps are the near record low interest rates for 30-year mortgages, which fell again last week to 3.42%, down from 3.83% the year prior.

With steady jobs growth, higher hourly wages, and ultra-affordable mortgages, families are once again feeling empowered to make large purchases, including homes and home furnishings. When we constantly see the near-7% unemployment number, we tend to miss the inverse 93% employed statistic.

The NAHB index is clearly indicating that the comfort level in home buying is back and getting stronger.

The Other Cost

Yet while the financing costs of buying a home are more affordable than ever, the home’s price is itself often more elevated than it would normally be.

This comes as a natural consequence of increased buyer interest. The more interest there is in a property, the higher the asking price will be – naturally, since the seller wants to get the best price he/she possibly can.

So while the low interest mortgage could save a family, say, 20% of the total cost, the price of the home could easily be more costly by that same 20%, if not more, due to buyer demand. These two costs are at the opposite ends of the cost teeter-totter; when one cost falls, the other rises.

But the balance between the home price and the mortgage’s interest rate could become progressively worse as the years roll on. Should that mortgage be on an adjustable rate in need of periodic renewal, the renewed interest rate will only go up as interest rates begin rising in a few years’ time, while the high price of the home will have been locked in at the time of purchase.

Over the years, the family will end up paying much more than it originally thought, given the higher than normal home cost at the time of purchase plus the gradually rising interest rates throughout the life of the mortgage.

“We are currently in a carnival funhouse mirror,” jokes Stan Humphries, chief economist at real estate web service Zillow.com. “Homes seem quite affordable when at base they are not.”

Humphries worries the Federal Reserve’s plan to re-inflate housing prices after their plunge a few years back may go on for too long and actually over-inflate them. “[It] could, if it hasn’t already, reinflate a bubble in the housing sector,” he warns.

He predicts that when interest rates finally begin rising, home prices will fall rapidly, once again leaving home buyers with mortgaged debt that is worth more than the true value of their homes. “It’s really a period of oscillations that will be disorienting for buyers and sellers,” he explains, “and I think we are far from done.”

[The ideal situation, if one could wait for it, would be to buy when interest rates are high. Home prices would be low, which would be locked in by mortgage, and interest would gradually drop as renewable mortgages are renewed at falling interest rates over the life of the mortgage. That's if one can wait that long. High interest rates could take another decade to arrive.]

Investing In Housing

The one thing to remember about any investment, however, is that you will never avoid volatility anywhere for any extended period of time. That is even more the case with a home that can take 20 to 30 years to pay off.

Even though one may end up paying a little more in either the purchase price up front or interest payments over time, renting is still far more costlier, since rent is completely gone whereas mortgage payments will at least build up reusable home equity. Buying now, even at pricey levels, could still be more prudent than renting.

But there are other ways of investing in the current real estate boom without buying a property at all. Real estate investment trusts (REITs) own properties and mortgages, and they often pay above-average dividends collected from the rents and mortgage payments they receive.

Housing related stocks are also experiencing a surge in value, as people purchase home furnishings and undertake renovations. Home Dept (NYSE: HD) has soared from around $30 to nearly $78 in the last 1.5 years, while Lumber Liquidators Holdings Inc. (NYSE: LL) has skyrocketed from $15 to $90 over that same period, as both companies cater to home builders and home owners alike.

As with any investment, the benefits should always be viewed in relation to other investment choices. It may be extremely difficult to assess the merits of any one investment vehicle when evaluated alone. But in comparison to other available options, each vehicle’s advantages and disadvantages become clearer.

Is an orange for 50 cents a good deal? That may be hard to say. But compare it to an apple selling for $1 – now your perspective is clearer. In any investment decision, be sure to compare your apples and oranges.

Joseph Cafariello

 

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