If you can afford to invest in it now, it's time to buy real estate. Housing may never be more affordable again in most markets. Mortgage rates are at record lows and based on a recent report, home prices are on the rise again. So, for those who have a safe store of wealth, strong job security and are not living in their own home yet, I suggest investing in real estate now. Those who are a bit better off, might wisely add income earning property to their portfolios. Even as the economy slows anew, threatening to stymie real estate demand, I see other factors that could price real estate out of bounds for most Americans in the future.
The Federal Reserve's efforts to stop the bleeding in housing and rejuvenate the critical sector have combined with international issues to drive U.S. interest rates down. Mortgage rates seem to strike a new record low each week, though the impact to housing demand has been diffused by ongoing economic sluggishness. Yet, those who can afford to buy a home should not let the inability of others affect their decision making now, or risk missing an opportunity to secure unprecedented low fixed mortgage rates.
Tuesday, S&P Case Shiller reported a 0.9% increase in its seasonally adjusted 20-city composite index for May. The increase followed a 0.7% surge in April. Economists were looking for a 0.5% price rise, with the range of forecasts stretching from 0.0% to 0.8%. The result therefore exceeded not only the consensus of forecasts but the entire range. And growth was widespread too, with 20 of 20 MSAs recording price rises in May. Also, on an unadjusted basis, both the 10-city and 20-city composites noted 2.2% increases.
These two factors, low rates and rising prices, should be drawing those interested in home purchases into the market. However, Bank of America (BAC) just reported it funded 3.6% less residential mortgage loans in its second quarter. The nation's major mortgage lenders, like BofA, Wells Fargo (WFC) and Citigroup (C), are burdened though by claims of mortgage security holders and insurers that improprieties impacted faulty loans, and thus infected pools of securities. BofA and others are finding Fannie Mae (FNMA.OB) passing more loans back to them as a result. Until this pressure eases, the banks are going to be less free to lend, but that shouldn't stop you from applying for a mortgage loan if you can qualify. You just might try Toronto Dominion (TD) or PNC Financial (PNC) instead.
The news of many Americans gravitating to rentals, with vacancy rates on the decline, should neither scare those who can afford to buy a home to seek one. Billionaire Warren Buffett, Chairman and CEO of Berkshire Hathaway (BRK.B), along with other market mavens have advised investors to buy into fear, and I advise the same now for those who can afford a house and qualify for a loan.
It seems seasonal spring sales strength has eased, with the latest New Home Sales and Existing Home Sales paces declining at last reporting. Major homebuilder shares have taken a hit recently as a result, with the SPDR S&P Homebuilders (XHB) feeling more heat Tuesday, declining 2.1%. Individual homebuilder shares were struck even harder, with PulteGroup (PHM), Ryland Group (RYL), Toll Brothers (TOL) and Hovnanian (HOV) down between 1.7% and 2.9% Tuesday. I've been adamant about selling the cyclical homebuilder stocks ahead of the economic softness I see ahead. But buying real estate is not synonymous with buying homebuilder stocks.
Despite my concern that the softening economy must impact the real estate sector, I like real estate for the hard asset investment now. I even believe the S&P Case Shiller data might soon reverse again, especially with the latest release of foreclosure property; and yet I still say buy real estate. I expect mortgage rates to decline further near-term, and yet I favor buying real estate now. Why? It's because prices and rates are good enough now, and what lies ahead scares the heck out of me.
I see a real chance for a state of affairs where mortgage rates are too high for most of us to afford or to qualify for auto, home and other loans. I see dollar dilution and fiscal fallout, and possibly other external factors, leading U.S. treasury yields and other interest rates much higher. So rather than wait for potentially better housing affordability in the near-term, I recommend real estate now for those who can still afford it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.