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‘Housewarming Party’ Continues in Q1

Real estate prices / continue to march upward; / ergo: wealth effect


QuarterlyReviewOutlook185“I’ll be back!”

Like Arnold Schwarzenegger’s classic line from The Terminator, the real estate market is back with a price vengeance.

Data from the S&P/ Case-Shiller Home Price Indices show that real estate prices are up 8.1% for its 20-city composite year-over-year through January 2013.

Annual percentage returns have been steadily rising since 2011. In fact, all 20 of the composite cities had year-over-year gains last year, and 19 showed acceleration of gains. New York City broke a 28-month losing streak to post positive gains, and Phoenix was up a remarkable 23.2%!

Both the 10-city and 20-city composites had their highest year-over-year increases since the summer of 2006, which represented the peak of the last seller’s market before the bubble burst. The areas that were hit hardest during the long housing market decline — such as Phoenix, San Francisco and Las Vegas — are the ones that are booming the most.

Based on subjective reports from Realtors and mortgage lenders, I would expect those numbers to increase when we get the February and March data. As I recently described here, multiple offers on new listings are the norm, and even cash buyers making offers at list price or slightly above are no longer shoo-ins to win the bids. Buyer zeal is driving up prices in a manner not seen since 2006, when pure greed was the propelling force behind an accelerated run up in prices.

Yet, unlike then, 2013’s feeding frenzy for homes is due to an inventory scarcity that has been artificially created by the following:

  • A deliberately slow release of bank foreclosures in order to keep prices firm.
  • Prices below levels at which underwater owners can sell.
  • The FED buying mortgage-backed securities to keep interest rates low.
  • Fannie Mae and Freddie Mac selling large blocks of foreclosed properties to hedge funds.

In addition, investors who are flush with cash from an overheated stock market are grabbing homes away from first-time homebuyers, who are desperate to take advantage of low interest rates before they disappear.

The end result is that homeowners are once again feeling the “wealth effect” from rising real estate values. The wealth effect refers to an increase in spending that accompanies an increase in perceived wealth. Even if homeowners have no plans to sell their homes, just knowing that the values are rising again triggers a greater sense of economic security, which drives them to spend more.

But is this renewed confidence in housing merely a house of cards? There are several factors that could throw some cold water onto this hot real estate market, such as:

  • The NAHB Builder Confidence Index declined two points to 44 in March, and has not risen since December. Any number below 50 is regarded as a negative outlook.
  • February new single-family home sales came in at 411,000, up 12.3% from a year ago, yet down 4.6% from the January revised rate of 431,000. These are seasonally adjusted annual rates.
  • The 30-year fixed-rate mortgage is slowly creeping up. The current national average is 3.68%, yet as recently as December 2012, it was only 3.35%. And interest rates are likely to continue rising.
  • As prices rise and mortgage principal is paid down, more homeowners who were previously underwater will finally be able to list their homes for sale. This will increase the current five-month supply levels, and could put a lid on prices.

However, these are minor considerations for now. As little as three years ago, the 30-year fixed mortgage was almost 5%, so today’s rates are still outstanding. Current demand for homeownership is back, and the busy spring and summer months have just begun. In fact, uncommonly cold and snowy weather in the Midwest and Northeast might have kept the recent numbers lower than they otherwise would have been.

As for homebuilder stocks, they continue to do well. The SPDR S&P Homebuilders Index ETF (NYSE:XHB) was at three-year highs this past week. Three of the strongest stocks in the sector right now are KB Home (NYSE:KBH), Ryland (NYSE:RYL) and D.R. Horton (NYSE:DHI).

Investors should enjoy the housewarming party while it lasts.

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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