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Proceeding Cautiously in the Housing Recovery

Written By Brian Hicks

Posted August 29, 2013

The housing market was looking good for a few months. People were buying homes left and right, and they were basking in the glow of the low mortgage rates and home prices.

housing trendsIn May, something happened. Mortgage rates started to climb, and people started to get scared. Fewer home purchase contracts came in last month, and everyone is starting to wonder if the recovering housing market is slowing down.

Contracts Decline – Home Sales to Follow?

The summer heat must have affected homebuyers, because there’s been a slow down. Okay, so maybe it’s not exactly the summer heat, but it could be the heat of the rising mortgage rates, or the Federal Reserve’s possible tapering of its bond-buying stimulus program, which could cause mortgage rates to skyrocket.

In July, fewer Americans signed contracts to buy homes. While the number of contracts signed is still at a 6 ½ year high, the decline is of concern to many who were confident the housing market was recovering.

While there has been a decrease in the number contracts submitted, the National Association of Realtors reports that the seasonally adjusted index of home sales only declined 1.3 percent. It was 109.5 in July, which is only slightly lower than the index number of 111.3 in May – the highest since December 2006.

The one thing you have to keep in mind is that there is a lag between contract submissions and home sales. It usually takes about a month or two to close on a home. The consequences of a lower number of contracts submitted won’t be seen for a couple of months, so the numbers of home sales may begin to show a decline in September.

This could come as a shock to many because homes sales in July were at 5.4 million, the highest since 3 ½ years ago. This reflects a healthy housing market, but are we still headed in that direction?

Jim O’Sullivan, chief U.S. Economist at High Frequency Economics, wrote in a note to clients:

Higher mortgage rates are clearly negative for housing, but other key drivers, including the labor market, confidence, and expectations for prices and interest rates still point to improvement.

What everyone needs to keep in mind is that while mortgage rates are rising, they are still low by historical standards. For example, last week, mortgage rates reached 4.58 percent – the highest it’s been in two years, but still much lower than it was in 1985 at 7 percent.

This may be what is still driving the housing recovery, along with a better labor market outlook. Unemployment rates are declining, which has increased consumer confidence, according to Conference Board data. The index for consumer confidence rose to 81.5 from 80.3 last month, much more than the 78 economists expected.

Investment Option in a Recovering Housing Market

As an investor, you’ll want to know where you can get in and make a return on a rising market. You may have thought the housing ship has sailed, but that’s not true yet.

As we look at some realty companies, we see that they are not stepping back from the housing market, so maybe you shouldn’t either.

The consumer confidence index and steady home sales are most likely the main factors encouraging to companies filing IPOs. One of these companies is Homebuilder LGI Homes, which will list on the Nasdaq under the symbol “LGIH”, according to Reuters. The company, which builds new homes at entry-level prices up to $260,000, filed with U.S. regulators to raise $125 million for an initial public offering.

Other companies that have recently filed IPOs are:

  • Independence Realty Trust, Inc. (NYSE: IRT)

  • American Homes 4 Rent (NYSE: AMH)

The news that more companies, like Re/Max, are filing for IPO is a good one. It means that these companies feel the housing market will forge ahead, despite the slowdown and possible increase in mortgage rates. With consumer confidence high, more Americans working, and home prices still at historic lows, the housing market will continue to recover, and companies are going to take advantage.

You can also take advantage of the recovering housing market by investing in these companies. Once they are live on the stock market, you can invest in shares. As they continue to build and sell homes in the recovering housing market, you could see the return you’re seeking.


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