Get ready for the real estate bears to step up their scare tactics. Why? Because in the last 24 hours, S&P/Case-Shiller reported December results for its widely tracked home prices indices. And prices jumped 6.8% in the last year, ahead of the expected 6.6% increase. That's the biggest yearly gain since July 2006.
Like I said, bears are bound to pounce on the bigger-than-expected gains as further proof that we're in the midst of another real estate bubble. (Or at least near a peak in the recovery.) It's total hogwash! To prove it, I'm sharing another five signs that the real estate recovery is far from over.
Before we're done with this debate, I'm also going to share a short-list of opportunities to consider, in order to profit from a prolonged recovery. So let's get to it…
6. Strengthening, But Not Overheating.
Digging into the latest real estate price data reveals that prices rose in 19 out of the 20 markets tracked. But isn't that the sign of a top? Nope. It's an indication of a strengthening market, not an overheated one. Or as HSBC (HBC) economist, Ryan Wang, said, "Last year was clearly a year of improvement, but there's still a long way to go." A very long way to go, in fact.
As I've shared before, real estate prices remain well below their 2006 peaks. Even if prices increase another 6% to 7% this year, we'll still be comfortably below those levels. So there's still plenty of room for prices to run. And we should expect them to run higher, too…
7. It's All About Supply, Stupid!
The latest existing home sales data from the National Association of Realtors (NAR) reveals a shocking lack of supply. I've experienced it firsthand, too, as I've been buying and selling real estate in the Central Florida market recently. In December, the nation's inventory of existing homes for sale fell nearly 5%, hitting the lowest level since December 1999. Year-over-year, inventories are down 25.3%. And based on the current sales rate, the 1.74 million homes on the market will be gone in just 4.2 months.
Keep in mind, in a normal market, inventories typically check in at about a six-month supply. So forget about being overheated, we're still not even back to normal. The end result? Simple economics dictates that increased demand and limited supply will lead to even more price increases. Speaking of demand…
8. Cheap and in Dire Need.
Thanks to record-low interest rates, homes have never been more affordable. Ever. The average rate on a 30-year fixed mortgage crossed the tape at 3.56% last week. That's within spitting distance of the record low of 3.31%. Of course, a cheap product only sells if there are buyers to capitalize on the bargains. And in this case, there's no shortage.
Roughly one million new households will be formed this year. And those new people will need houses to live in. By 2017, a total of six million new households will need a home, according to JPMorgan's (JPM) estimates. So you can also forget about demand approaching a peak. It can only go up from here, as new home construction still isn't keeping up with new household formation.
9. More Jobs, More Houses.
Record affordability means nothing if Americans literally can't afford to buy a home. But thanks to an improving employment market, buying a home is becoming an option again. The more the employment picture improves, the more we can expect the real estate market to pick up.
10. Good Credit Now Required to Buy a House? Go Figure.
One of the major contributors to the last real estate mania was runaway lending. Anyone with a pulse could get a loan. Without documentation, no less. The good news? We aren't returning to such dangerous lending practices during this recovery. Right now, about 57% of approved mortgage applicants boast FICO scores above 740, compared to just 45% back in 2005, according to Jed Smith, Managing Director of Quantitative Research at the NAR. He actually goes as far as saying, "We think financial institutions are requiring FICO scores that are excessively high." You keep thinking that, Jed. In reality, insisting on higher credit scores is a good and responsible thing. It ensures that the real estate market doesn't get (way) ahead of itself, again.
Bottom line: In the famous words of M.C. Hammer, the real estate recovery is "too legit to quit." That's not just my opinion, either. It's based on hard data. Of course, I wouldn't be much of an analyst if I just told you to expect a continued recovery - but didn't provide some specific ways to profit from it. So I'm going to do just that in tomorrow's column.
For those of you who still aren't buying into all this real estate bullishness, don't tune out. Instead, treat tomorrow's list of companies as potential short-selling candidates. After all, if you're so dedicated to your stance, you should be willing to put some money on the line to back it up, right?
Then, six months from now, we'll compare our results and let the market determine the ultimate winner. You up for the challenge?