In case you haven’t noticed… the housing market is making a recovery. Most investors still shudder at the thought of investing in real estate again, but it’s time to reconsider. But before we get into more reasons why we think now’s the time to buy real estate-related investments (and our favorite investments in this industry)… let’s take a quick look down memory lane. To a time when real estate used to be the absolute darling of the markets. Rallying behind one of Mark Twain’s many droll quotes – “Buy land, they’re not making it anymore” – people in the newly minted twenty-first century pounced on whatever property they could get their hands on, refusing to learn the lessons of even the recent past.
For example, as the 1900s came to a close and the 2000s first made their debut, everybody was ranting and raving about technology stocks, predominantly those pertaining to the internet: the so-called dot.coms. That ended very, very badly, of course, but not nearly enough people thought twice before jumping onto the very next bandwagon that rolled along. And as property gave solid return after solid return after solid return, the movement gained a religious and borderline cult-like following.
Nobody could say anything bad about it without fear of a good dose of professional and social censure. People were having too much fun and making too much money on the skyrocketing real estate market. They made lucrative side-jobs and even entire businesses off of buying up homes and selling them a year or two down the road for worthwhile profits. Sometimes they put some effort into remodeling the houses and sometimes they wouldn’t. But either way, they knew they were going to make a buck off of the deal.
And they were dead right… until 2006, when the market peaked and then 2008, when it crashed entirely.
Though history has proven them tragically mistaken, to some degree, their blind faith and willing worship at the altar of housing prices was understandable. It’s always much easier to look backwards and judge people for their foolishness than to fight popular opinion in the heat of the moment. And it’s especially difficult when all of the oft-quoted facts point to that popular opinion.
After all, housing prices had skyrocketed compared to where they were in the 1990s and 1980s. A certain amount of upward movement is expected due to inflation and an improving economy, of course. And a chart of the housing market from 1970 and 1998 shows just that. In 1970, the median U.S. home cost just above $25,000, nominally. A decade later, it was over $50,000, and it had doubled again another ten years down the road.
By the start of the new millennium, the average person looking to buy a home had to expect a decent $125,000 price tag. But just six years later, when the index peaked, that median price was pushing upwards of $250,000. And, really, who wouldn’t want a piece of that action?
Throw in the federal government with its affordable housing acts, the banks with their badly thought-out policies, and the general populace who didn’t bother to look into the real reasons behind the unprecedented rise… and it was a disaster waiting to happen. But on the surface, it just looked like a good thing going on and on and on.
There were plenty of intelligent, sober-minded people in the real estate brokerage, mortgage and homebuilding industries telling anyone willing to listen that the fundamentals were unsustainable and the craziness couldn’t last.
Sure enough – as we know now – the bubble burst, the market crashed and people lost fortunes in the aftermath.
But now these same insiders are telling me just the opposite. The housing market is not just coming out of its slump. It is snapping back fast.
READY FOR LIFT OFF
Shares of the leading homebuilders will soon be prime beneficiaries. While the sector has already begun to lift off – along with sales and earnings – they are still quite cheap and likely to lead the market higher in the second half of the year.
Consider the Federal Reserve. Not only is it keeping short-term rates near zero, but it’s also buying longer-term bonds and mortgage securities in the secondary market, keeping those rates artificially low.
Don’t underestimate what a powerful tonic this is.
Before the Fed started buying mortgage-backed securities in late 2008, a borrower paid more than 6% for a 30-year fixed-rate mortgage. If a couple could qualify for a $1,000 monthly payment, they could get a $165,000 mortgage.
Today, with a 3.5% rate, the same borrowers can borrow as much as $222,000.
Banks, of course, gave mortgages to anyone with a pulse during the boom times and now that prices are low, they have suddenly discovered lending standards. In the process, they have boxed out some potential buyers.
But sources tell me that banks are finally loosening those standards and – while no-money-down mortgages may never (and should never) be common again – borrowers with decent credit are getting financed more easily.
BUYING MANY HOMES… WITH ONE PURCHASE
House prices are cheap right now. At an average 30-plus percent below their peak, buying a home is a bargain in just about any area of the country. In fact, in many cities, it’s even more affordable to buy – taxes and all included – than to rent.
Better yet, mortgage rates are still hovering near their all-time lows.
Also, according to The Wall Street Journal, inventories of homes available to buy have fallen to 20-year lows. This comes as a shock to those used to hearing about unsold homes and a potential avalanche of foreclosures. But, with prices coming back, many sellers have decided not to take a loss and have withdrawn their properties from the market.
Plus, banks are selling fewer foreclosures. And cash investors have scooped up many homes, converting them to rentals.
Rising rents are making home ownership look attractive again. And since homebuilders have added little in the way of new construction over the last five years, the inventory of new homes is selling fast. Many homebuilders have reported quarterly sales that are up by 30% to 40%.
Across the country, prices of existing homes rose 10% in February from a year ago. And as the spring buying season hits full stride, they should rise even further.
So, if you want to buy a house, we think now’s a great time to do it. But there is another purchase that you can make that will give you a much more diversified real estate portfolio.
If you believe, as I do, that this trend will continue, the easiest way is to play it is to buy the entire sector: A real estate ETF.
Three of the best exchange-traded funds are the SPDR S&P Homebuilder ETF (NYSE: XHB), the iShares Dow Jones US Home Construction Index Fund (NYSE: ITB) and PowerShares Dynamic Building and Construction Portfolio (NYSE: PKB).
According to my research, homebuilders are set to beat consensus earnings estimates by a wide margin in the months ahead. That gives them plenty of profit potential from current levels.
Good investing,
Alex
Original article by Alexander Green, Investment U Chief Investment Strategist