How Higher Mortgage Rates Will Dent Housing's Recovery
How much do higher mortgage rates reduce home sales?
That, of course, depends on how much rates rise and whom you ask. But there's no doubt higher mortgage rates hurt sales, experts say.
Interest rates have been climbing since May. Rates on 30-year, fixed-rate mortgages averaged 4.37% for the week ending July 18, Freddie Mac's weekly survey of conforming mortgage rates said. That's up more than a percentage point from early May.
And existing home sales fell 1.2% in June, to a seasonally adjusted annual rate of 5.08 million, from 5.14 million in May (but still 15.2% higher than in June 2012), the National Association of Realtors said Monday.
Lawrence Yun, the NAR's chief economist, told Money Morning he expects interest rates to hit 5% to 5.5% within a year. And while he foresees existing home sales rising as much as 10% for 2013, he predicts only a single-digit percentage increase next year primarily because of higher mortgage rates.
"There's no risk of any reversal of this housing recovery; it's just slowing the pace of this housing recovery," Yun said.
He said robust demand and affordable prices would lessen the impact of the higher mortgage rates in much of the country, but pricier markets in New York, parts of California and Hawaii would be hit harder by the higher mortgage rates.
Big REIT Opportunities in the Housing Market Recovery
If you listen to most pundits, you would think housing is on its way back.
But I don't listen to people. I do my own research and make up my mind.
And what I've found is that this housing rally is a double-edged sword. But if you're smart you take advantage of its potential while eliminating much of its real risks.
The one edge: A more active market is undoubtedly good for the economy, since it leaves less money trapped in houses people no longer want. But rising prices are not good news, as I explain below.
The other: There are still some excellent opportunities in the real estate sector through real estate investment trusts (REITs), but you need to very selective (also below).
And as usual, it's all about 3 things: location, location, location.
Except this time around, it's not the locations you would think.
A Cautionary Tale
Let me explain by example…
I have just returned from Britain and the trajectory of that economy shows very clearly: High real estate prices are a major competitive disadvantage.
House prices in Britain are much higher than in the United States. The average house price in June 2013, according to Rightmove's house price index, was 253,000 pounds, about $382,000 at today's exchange rates.
That compares with about $266,000 in the U.S., taking a weighted average of new and existing home sales prices. However, you have to add into this calculation the reality that British incomes are only around 80% of U.S. incomes, when converted at market exchange rates (about 75% at purchasing power parity).
So in terms of earning power, U.K. house prices average about 80% higher than U.S. house prices.
That doesn't take into account the fact that British houses are on average substantially smaller than U.S. houses, or the exorbitant additional costs of trying to live in London, Britain's bloated capital, where house prices have been pushed up by the advent of wealthy Russians.
Will the Home Mortgage Interest Deduction Vanish in 2013?
In 2013, Congress is expected to explore a number of tax reforms in order to address staggering deficits and a crippling $17 trillion in debt owed by the Federal government.
No proposed tax reform will be more controversial this year than attempts to alter the Home Mortgage Interest Deduction (HMID).
Considered the holy grail of tax deductions, the annual tax break to homeowners, which provides more than $100 billion a year in tax relief, could see significant changes, thus affecting the finances of millions of Americans.
But in order to understand how these changes could affect you, one needs to understand how this tax break became so monstrous in the first place, and what the impact of such proposals could have on the housing markets.
In fact, this very issue proves why even grander tax reform is necessary right now in the United States.
Hedge Fund Sues Government Over Seizing Fannie Mae, Freddie Mac Profits
A hedge fund hoping to capitalize on the comeback of Fannie Mae and Freddie Mac claims in a lawsuit the government illegally seized the profits of the two mortgage finance giants.
The suit, filed Sunday by Perry Capital LLC, says the government violated a 2008 law that put Fannie and Freddie into conservatorship, through an amendment changing the terms of the government's bailout.
Under original terms, Fannie and Freddie paid fixed quarterly dividends equal to 10% of the government's stake.
But in 2012, the U.S. Treasury Department amended the terms of the bailout and began taking all Fannie and Freddie's quarterly profits.
Theodore Olson, an attorney representing Perry Capital, said in a news release the 2008 law "established very specific rules about the government's limits and obligations under conservatorship. Investors had every right to expect these rules to be followed.
"If the government wanted to assume the powers of receivership, it could have chosen that course," Olson said. "Instead, it chose conservatorship, and with the [amendment] it overreached, exceeding the legal boundaries of the statute and failing to meet obligations of conservatorship mandated by Congress" under the 2008 law.
How to Profit from the Housing Market Recovery
Housing has rebounded in a big way.
Sales of new, single-family homes surged from April to May at the highest rate since July 2008 and by 29% over the previous year, while existing home sales reached the highest level since November 2009.
And home prices posted their biggest annual increase in more than seven years in May and are expected to continue rising, CoreLogic said Tuesday.
How can you profit from the housing market recovery?
Buying the homebuilders' stocks? Sure, but that's almost too easy, and after impressive gains, homebuilder stocks may have peaked for the short term.
But savvy investors trying to figure out how to profit from the housing market recovery can look beyond the homebuilders to other companies benefiting from the recovery.
Among them: construction materials suppliers, home improvement retailers, paint companies and those manufacturing and selling furniture and appliances.
In fact, furniture and related products led all other manufacturing sectors in the latest Institute for Supply Management report for June.
Here are five companies worth a look if you're seeking to profit from the housing market recovery.
Playing the Housing Market Recovery
Why U.S. Home Prices Have Been on a Tear
In another sign the housing recovery is genuine, home prices soared the most in more than seven years in April in 20 U.S. cities.
The S&P/Case-Shiller index, released today, climbed 12.1% from April 2012, marking the biggest year-over-year increase since March 2006, and rose 2.5% from March to April.
“The recovery is definitely broad-based," David M. Blitzer, chairman of the S&P's index committee, said in a news release. "Recent economic data on home sales and inventories confirm the housing recovery’s strength."
Experts cited an improving job market, low mortgage rates, high demand and a shortage of housing on the market.
Meanwhile, new home sales rose a bit less than expected in May but climbed a whopping 29% compared with May of last year.
All 20 cities in the S&P/Case-Shillert index, which includes metropolitan areas, showed year-over-year increases in home prices.
San Francisco posted the biggest gain, 23.9%, followed by Las Vegas, at 22.3%. Atlanta, Detroit, Los Angeles, Miami, Minneapolis, Phoenix, Portland, San Diego, Seattle and Tampa showed double-digit gains.
Homebuyers in Bidding Wars
Home prices in Dallas increased 7.4%; in Washington, D.C., 7.2%; and in Cleveland, 4.8%. The smallest increase was in New York, at 3.2%.
Even with the increases, home prices aren’t rising fast enough to price buyers out of the market. Indeed, competition for homes has led to bidding wars in some places, including Los Angeles, Boston, San Francisco, Seattle, Washington, New York, Miami and Phoenix.
And home prices haven’t even approached levels seen during the housing bubble.
Celia Chen, an analyst with Moody's Analytics, told Money Morning that home prices still remain 26% below peak bubble levels.
“The recovery’s alive and well,” Jed Kolko, chief economist at the real estate site Trulia.com, told Money Morning. “Prices continue to rise, new home sales are up and delinquencies and foreclosures are falling.”
Higher prices have also rescued many underwater homeowners.
Kolko noted an extraordinary statistic: It’s cheaper to buy than to rent in the top 100 U.S. housing markets.
At the same time, the inventory of houses available for sale has begun increasing as higher prices have prompted more homeowners to list their homes and more homebuilders to construct new homes.
And one of the nation’s largest homebuilders, Lennar Corp. (NYSE: LEN) reported today it beat analysts’ estimates for the three months through May as prices and sales increased.
Lennar Chief Executive Officer Stuart Miller said on a conference call today he wasn’t too concerned about rising interest rates.
“Interest rates are moving higher in the context of economic improvement,” Miller said. “We’re looking at a supply shortage, so that means that even in the context of rising rates and a better economy, we’re likely to see price increases and rental increases.”
Last week, a new survey of homebuilder confidence from Wells Fargo Bank and the National Association of Home Builders reached its highest level since 2006, and housing starts climbed 6.8% in May and 28.1% year to date.
Why Homebuilder Stocks are Suddenly Plunging
Homebuilder stocks had soared in 2012 in the early stages of the housing recovery, but have since leveled off and had perhaps peaked earlier this year.
Then Thursday, major homebuilder stocks plunged amid fears of rising mortgage rates.
The declines came a day after the Federal Reserve suggested it may reduce the bond buying that has pumped up equity markets for more than a year.
Experts noted that homebuilder stocks are particularly sensitive to rising interest rates.
With rising rates, said Money Morning Chief Investment Strategist Keith Fitz-Gerald, "The homebuilders are going to have to do one of two things: They're either going to have to stop building because there's no demand or they're going have to lower their prices, which is going to hurt their profit margin."
7 Reasons This Housing Market Recovery is Genuine
"It almost seems too good to be true," Lawrence Yun, the chief economist at the National Association of Realtors, told Money Morning.
The latest confirmation of the market's rebound is the new survey of home builder confidence from Wells Fargo Bank and the National Association of Home Builders, which climbed to its highest level since 2006.
And housing starts were up 6.8% in May and 28.1% year to date, the U.S. Census Bureau said.
The Fight Club: Are "Dignity Mortgages" Essential or Insane?
Editor's Note: There's a new idea sweeping through the country. It's called dignity mortgages.
Backers say this new financing idea will help millions of homeowners and get the middle class back to the heart of the American recovery.
Opponents think it's a recipe for disaster that will make the first financial crisis look like a cakewalk.
Today the Fight Club is taking on this growing issue — let's get ready to rumble…