Why The Real Estate Market Is Topping Out

homebuilders

: The housing market (NYSEARCA:IYR) continues to produce some healthy gains for investors. Home builders edged higher on Tuesday after the S&P/Case-Shiller 20-City Home Price Index surged another 12.4% in July, above the Briefing.com estimate of 10% and the 12.1% advance in June.

As shown on the chart below, the index has been on a steady upward climb since February 2012, and there appears to be nothing stopping the move in the housing market.

Of course, the accommodative monetary policy adopted by the Federal Reserve has been the primary reason for the advance in home builds, sales, and selling prices—the “evidence” behind the so-called housing market “recovery.”

But be careful.

It’s true that the financing costs for homes could likely stay historically low for a few more years, which would help add support to the housing market. However, I feel there could be a sort of bubble on the horizon.

Case-Shiller Home Price Chart

Chart courtesy of www.StockCharts.com

Let me explain.

The upward move in the housing market has largely been driven by foreclosures, short sales, and very affordable mortgage rates.

The problem now is that financing rates are not going to stay at these low levels indefinitely. Interest rates are heading up, folks, and it’s not a matter of if, but when.

If you believe the Federal Reserve, interest rates will likely begin to turn higher sometime in late 2014, depending on if the unemployment rate can improve to 6.5%. There is no guarantee the jobs market will improve by next year and drive the jobless rate down. In fact, the jobs market may not improve, and we may have to wait until early 2015 before rates begin to edge higher.

Yet even without an upward push in interest rates, there are other factors that could take the housing market down.

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