U.S. Housing Recovery Continues, Though Headwinds Remain

| About: SPDR Homebuilders (XHB)
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By FS Staff

The following is a summary of today's podcast interview with Rick Sharga, CMO at Ten-X, on the state of the US housing market, which can be listened to on our site here or on iTunes here.

The state of the housing market in the United States is perennially of concern to investors, and though the market overall is in recovery, there are several considerations investors need to take into account before committing their capital.

This time on Financial Sense, Rick Sharga, CMO at Ten-X, formerly Auction.com, gave his perspective on the current market and how he thinks the housing recovery will play out.

Bullish, But With Caution

Though many observers have suggested the housing market is in a strong bull trend, Sharga is more tempered.

"I do think the market is still in recovery," he noted. "We went through the most volatile boom-and-bust cycle in the history of the housing market in the mid-2000s, and we dug a hole so deep that almost anything looks like improvement."

Things are continuing to move in the right direction, he added. Both the number of existing and new home sales have maintained an upward trend despite significant headwinds, and he expects this to continue.

Headwinds Do Exist and Will Continue to Trouble Markets

There are three major factors holding back the market right now, Sharga said. Interestingly, one of these isn't the prospect of mortgage rate increases some see looming on the horizon.

"Mortgage rates are the least of our problems right now," he said. "I have to laugh when people talk about the potential negative implications of mortgage rates going up by a point over the course of a year, and I'm thinking, 'So, a 30-year fixed rate will now be four-and-a-half percent?'"

Historically, it's easy to remember a time when mortgage rates were in double digits, and that didn't affect home sales too much, Sharga noted.

However, mortgage availability is a problem, and it's still around twice as difficult for the average borrower to qualify for a loan as it was during the pre-boom era, he stated. Banks aren't taking on any risk, he added, and though non-bank lenders aren't quite as circumspect, they're still making it a bit difficult for borrowers on the margin.

Another issue for the housing market is a lack of available inventory, Sharga stated. Markets are seeing very low levels of inventory in existing homes for a number of reasons, and new home inventory is at an almost 40-year low.

"There's just not that much to buy, which drives prices up and makes affordability the third issue, even though you wouldn't expect that with mortgage rates being as low as they are," Sharga said.

Beyond home prices and mortgage rates, what Sharga sees as the third leg of the "affordability stool" is wages.

"The middle-class today is making less... than they were 8 years ago, which makes rising home prices a problem," he noted.

Entry-Level Houses Are in Short Supply

The trend of very little entry-level housing stock being available is pervasive across the country, Sharga stated.

"Builders aren't building that kind of stock in large numbers, partly because of permitting issues... and partly because recent regulations that have entered the marketplace have added anywhere from $50,000 to $100,000 to the cost of building these new homes," he said.

Where the first-time homebuyer contingent currently only makes up about 30 percent of the any given month's sales, Sharga said, in a normal market it's closer to 40 percent.

Also, the numbers of single-family homes being turned into rentals are shooting up dramatically, going from 12 million back in 2009 and 2010 to about 16 million today, Sharga noted. Part of this can be attributed to the rise of companies such as Airbnb (AIRB), but recent regulations may curtail that trend.

"It'll be interesting to see if that slows down the juggernaut, or if Airbnb overcomes those obstacles and continues to grow," he noted.

Investors Take Note

The search for yield has driven many to seek real estate as a place to put their money, including foreign investors who see the US market as a good play, Sharga said.

"The truth is the market has been doing what a number of us predicted it would do after the bust," he said. "It's been recovering steadily, but very slowly, in sort of a sawtooth manner."

For the average investor with little experience, Sharga recommended staying local when looking at possible real estate investment opportunities.

"I don't think we'll get back to a full recovery, which would be home price appreciation stabilizing at 3 to 4 percent a year, and between 6 and 7 million units being sold between existing homes and new homes until 2018 at the earliest," he said. "There are just too many headwinds that are keeping the recovery from picking up full steam."