Why The Real Estate Market Is Topping Out

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September 26, 2013 4:13pm NYSE:IYR NYSE:XHB

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.

My primary concern is the lack of growth in jobs and wages. People still do not feel confident that their jobs will remain for the long term. The consumer confidence reading came in at 79.7 in September, which is still well below the 90.0 that is associated with a healthy economy. Unless people feel good about their job security, they will hold off on buying anything that could tie them down in a debt or cut away from their rainy-day savings.

In addition, a good portion of the increase in home prices has been due to the scooping-up of real estate by institutions and funds, and less by the average home shopper. This trend has created a false sense of confidence in the housing market; once the money flowing in begins to dry up, we will begin to see some fragility in the housing market.

I still think it’s a decent time to buy a home, especially in the depressed areas of the country. As for home builder stocks (NYSEARCA:XHB), I would be much more hesitant, as I believe the downside risk more than overrides the upside potential at this time.

This article is brought to you courtesy of George Leong from Investment Contrarians.


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