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Is This The End Of The Housing Recovery?

by: Financial Sense
Financial Sense
Registered investment advisor, dividend investing, commodities, ETF investing

By FS Staff

"Interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset."

-Warren Buffett

Is real estate still a good investment or has the U.S. housing market finally topped out? In his recent Big Picture podcast, "Real Estate: Good for Investors, But Not All Homebuyers," Jim Puplava noted that the recovery in real estate is still underway, though is now mostly driven by institutional and high net worth investors in an increasingly selective market.

Over the last eight months, pending home sales have slowed down due to weather, a rise in mortgage rates and a 12% rise in home prices from the same time last year.

Does this mean that the housing recovery is over?

No, said Puplava - who owns a number of buildings and properties in California - but the momentum has slowed and increasingly reflects the large wealth divide in the U.S.

Million-dollar homes in the U.S. are selling at double their historical average while middle-class property demand stumbles, showing that the housing recovery is mirroring America's wealth divide.

Purchases costing $1 million or more rose 7.8 percent in March from a year earlier, according to data released last week by the National Association of Realtors. Transactions for $250,000 or less, which represent almost two-thirds of the market, plunged 12 percent in the period as house hunters found few available homes in that price range.

Luxury-home sales are climbing as an improving economy and stocks that have almost tripled from 2009 lows bolster confidence among affluent buyers. At the same time, slow wage growth, tight credit standards and escalating prices are putting homeownership out of reach for many Americans. While investors drain the market of lower-end properties, builders are constructing more expensive houses that generate bigger profits.

Jim noted a number of factors that are still helping the housing market today: interest rates are still at record lows, foreclosure activity is shrinking, delinquency rates have tumbled, and U.S. real estate is still cheap compared to other major markets around the globe.

On the negative side, as also mentioned in the Bloomberg article above, credit standards are still tight, wage growth is slow, and first time home buyers are increasingly unable to enter the market with poor job opportunities and high student debt loans.

To give you an example, roughly 25% of potential home buyers have FICO scores below 600, yet, banks are targeting buyers at a much higher range: typically between 750-800.

So, if you do qualify and have enough money for a down payment, is real estate still a good investment? That all depends on your time horizon. The key is interest rates. As in prior cycles, the housing market recovery will likely peak once the Fed starts raising rates.

One astute observer of economic and financial trends, Kyle Bass, told us late last year that he didn't expect this to happen for another 3-5 years.

This might not be too far off.

Janet Yellen, the Fed's chairwoman, has made it clear that any increase in rates will be contingent upon lower unemployment and higher inflation - two things that aren't happening very quickly with our ongoing slow economic recovery.

For this reason, the Financial Times recently commented that trends in employment and inflation data show an increasing risk that "US interest rates will remain at the zero bound longer than currently anticipated, well into 2016."

If true, we may see at least another two years of inflation - not in food, energy and what the government measures, of course - but in the price of financial assets like stocks and real estate. Unfortunately, this doesn't help the first-time home buyer much.