The term “housing bull” hasn’t been heard much since the Great Recession was burned into the American consumer’s psyche. In fact, bearishness in the housing space has become the new normal, with many potential buyers just deciding that they will wait on that new home until conditions in the market begin to improve — if they ever do. Similarly, many investors won’t touch housing stocks with a 10-foot poll — from the obvious laggards like PulteGroup (NYSE: PHM), which is off -30% in the last year, to builders bouncing back like Toll Brothers (NYSE: TOL) which is up double-digits so far this year.
Well, those conditions are indeed beginning to improve, and that means right now could be the best opportunity to get in on a home at a very attractive price. Let’s take a look at five reasons why pulling the trigger on a new home purchase now could be the right financial move.
Home prices are starting to climb
According to a report from the National Association of Realtors (NAR), sales of existing U.S. homes jumped 12.3% in December. The upbeat month for home sales data comes at the tail end of what was a weak 2010. Annual home sales saw a 4.8% drop in the metric from 2009 levels, but the final month rise in sales could be the beginning of more upside in the sector. The NAR report also shows that although there is still a lot of inventory in the property market, those inventories have been gradually going down. Inventories in December of 3.56 million homes represented 8.1 months of supply, compared with 9.5 months in November.
Stock prices are too high
Buying a home is not only a deeply personal decision; it’s also a very serious investing decision. Should you invest in a new property now, or would you be better off funneling that money into stocks or other investments? Consider this — stock prices over the past 12 months, as measured by the S&P 500 Index, are up over 25%. What this means is that if you are a long-term investor looking to put money to work, now is not really the best time to get into equities. Conversely, median home prices in 2010 were up just 0.3% according to the NAR. In equity market terms, a home could be likened to an undervalued stock.
It’s cheaper to own than to rent
Buying a home now could actually be cheaper than the alternative of renting. That’s the conclusion of real estate data firm Trulia. According to the company’s Rent vs. Buy Index, buying a property—including mortgage principal, interest, taxes and insurance—was actually cheaper than renting in 72% of cities around the country. The firm compared a year’s rent for a two bedroom apartment, condo or townhouse with the cost of buying a similar property in 50 big cities around the country. Some of the most affordable areas to buy right now, according to Trulia, are Las Vegas, Miami and Phoenix.
Rising interest rates
Another cost-related argument in favor of investing in a home right now is interest rates. We saw mortgage interest rates rise steadily during the final weeks of 2010, with the average rate for a 30-year, fixed-rate mortgage finishing at 4.71% in December. That number represents a 4.3% gain from November. As the economy continues improving, we are liable to see rates continue climbing. That means that now is the time to lock in what are still historically low mortgage rate — before the cost of that loan spikes any higher.
A great inflation hedge
Historically, real estate and gold have been considered great hedges against inflation. And while the main measure of inflation, the Consumer Price Index (CPI) hasn’t gone off the charts. That’s because the CPI measure excludes food and energy prices. If you’ve been to the grocery store or bought a tank of gas in the last month, you know inflation is real. Plus, inflation is a game of expectations; if people think prices will be going up they tend to act. As the Federal Reserve has demonstrated, it is committed to printing more and more money, and hence debasing the dollar. That means more inflation down the road, and that means an inflation hedge like real estate could be just what the portfolio doctor ordered.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.