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Here Comes the Chill in Real Estate

The hot winds of early 2013 are cooling off for autumn and winter

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  • Homeowners insurance rates have also risen in recent years. Between 2003 and 2010, the average homeowner insurance was up 36%, and areas on the east and southeastern coasts of the U.S. — where hurricane potential is the greatest — continue to rise every year.
  • FHA increases in Mortgage Insurance Premium costs were initiated in 2012, increasing the upfront fees from 1% to 1.75%. They also raised the monthly PMI by almost $10 per month for a $100,000 home. This could set the stage for increases in other non-FHA loans as well.
  • Local tax rates are climbing as homes are reassessed, following the 12% price home price increases seen in the last year.
  • Debt-to-income ratios, currently permitted by law to go as high as 57% for owner occupants, are the subject of much debate, as regulators have hinted at plans to cap DTI at 43%. The feeling is that lower DTI ratios will reduce default rates. However, when DTI ratios are reduced, consumers are forced to either buy cheaper homes, or to wait until they pay down debt to buy more expensive ones.

All of these measures will impact the prices of homes that consumers can purchase, and soften the bids made on listed properties as well.

Of course, employment is the most important determinant of housing. Unfortunately, the implementation of Obamacare in a few months already has many businesses announcing cuts in the hours of previously full-time employees. Other companies are waiting to see how the new health care laws will impact their bottom lines before hiring new workers. This does not bode well for the real estate market.

Given these headwinds, investors should be cautious in selecting any real estate-related stocks, especially homebuilders. While investors might continue to buy foreclosures and short sales, it is typically the first-time owner occupants who are buying brand new homes.

The good news is homebuilder stocks have already been crushed during the past few months. Toll Brothers (TOL) is off roughly 20% from its May heights, while D.R. Horton (DHI) and KB Home (KBH) are each off about 30%.

The bad news is that while these stocks could produce an oversold bounce, the conditions mentioned above are likely to keep this sector a market laggard over the next four to six months.

So for now, stay away from homebuilder stocks until you see improvements in employment numbers, coupled with a loosening of fees and restrictions upon the mortgage industry.

Of course, given recent history, it’s doubtful either will occur anytime soon.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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