Is the Housing Market Recovery a Fake?

January 30th, 2014 by William Briat
XHB: SPDR Series Trust SPDR Homebuilders ETF logo
XHB
SPDR Series Trust SPDR Homebuilders ETF

Submitted by William Briat as part of our contributors program.

Is the Housing Market Recovery a Fake?

The U.S. housing marketis facing issues that must be addressed. The reality of the matter is that home buyers are still missing from the market—these are the people looking to buy a home and stay in it for a long time. If home buyers don’t come back to the housing market, hopes for the increase we saw in home prices in 2012 and 2013 will diminish very quickly.

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Existing-home sales data confirmed this: home buyers are just not excited to buy. According to the National Association of Realtors, in December, first-time home buyers accounted for only 27% of all existing-home transactions in the U.S. housing market. This number had declined from 30% in December of 2012. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors, January 23, 2014.)

But that isn’t all. Indicators that suggest home buyers will or may come to the housing market in full-steam aren’t in favor, either. Affordability is the main concern for home buyers; they buy homes when they can afford to. Sadly, we are seeing a rise in mortgage rates. As these rates increase, homes become less affordable for first-time home buyers, who will have to pay higher mortgage payments.

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How much have mortgage rates increased? In December of 2012, the 30-year fixed mortgage rate tracked by Freddie Mac was 3.35%. In December of 2013, it increased to 4.26%—or an increase of more than 27%.

This is all too dangerous for the housing market. You want to see a continuous flow of first-time home buyers in the market. Instead, they have been shying away for some time. Investors need to realize that first-time home buyers essentially provide liquidity to the housing market and that their absence can cause home prices to decline.

Note: I don’t expect the housing market to see an outright collapse as it did in 2007. But I just don’t see the home price growth rate for 2014 to be moving at the same pace it did in 2012 and 2013; we might even see a little decline in home prices going forward.

For investors, if this scenario plays out, they can profit by shorting homebuilder stocks. The reason behind this investment strategy is very simple: if the housing market suffers, those who are close to it will suffer as well.

Here’s something that investors should also note: over the last year, homebuilder stocks have struggled to move to the upside. Take a look at the chart below of SPDR S&P Homebuilders ETF (NYSEArca/XHB), which tracks the performance of the homebuilder stocks. Pay close attention to the circled areas.

Chart courtesy of www.StockCharts.com

Over the past year, homebuilder stocks traded sideways and didn’t make new highs until the end of the year. Since 2014 trading began, these stocks have shown some weakness, and it will not be surprising to see more of the same if the housing market caves in.

This article Is the Housing Market Recovery a Fake? was originally published at Daily Gains Letter