After moving to Southern California in the fall of 2011 and renting a place to live, my husband and I decided in January 2012 to begin the process of
looking for a home to purchase. We didn’t feel a big rush or pressure to make a quick purchase as the home market had been soft for some time and we
were still in a buyers’ market – or so we thought! We found a place we liked and after multiple showings decided to purchase the property. Imagine our
surprise when at the last minute we lost the property to another bid. In fact, two other bids came in on this property and it sold for full asking price.
We quickly realized that real estate in desired areas such as ours was making the turn – and there was no looking back.
The statistics on the turnaround in housing are tremendous. Certain areas of the country have recovered to or even above price levels attained before the
great recession of 2008-2009. Just recently, the S&P/Case-Schiller home price index indicated that home prices rose at their fastest pace in seven
years this August. Historically low inventory, record low mortgage rates and strong investor demand have driven this price appreciation and appetite in the
housing market. The question now – how long can the “party go on”?
The latest pending home sales report from the National Association of Realtors showed a nearly six percent drop in signed contracts to buy existing homes
in September from the previous month. While mortgage rates have pulled back from the highs of the summer, that fact hasn’t translated recently into sales
as higher home prices are keeping some buyers sidelined. We know that we are entering into a somewhat slower time of year for home sales as well.
The real “wildcard” in the housing arena is investor purchases which continue to make up roughly 40% of all home buying. With prices rising dramatically and
fewer distressed homes on the market, some investors are sidelining purchases. If the housing market starts to experience a slowdown, how long will these
investors remain in their properties? The answer is not clear. The management of these investments is costly. If profitability comes into question, at what
point might they desire to sell out of these investments in favor of other assets providing better returns? No one knows for sure, but such a mentality may
impact our housing market for years to come.
Perhaps equity investors are already aware of some of the potential concerns in the housing sector. If you take a look at many of the homebuilder equities,
you will see charts that look nothing like that of the S&P 500 this year. These equities made their dramatic bullish run in 2012 in anticipation of the
sort of housing data we have seen this year. It has been difficult, despite an array of bullish housing data, for these equities to continue to appreciate
considerably. This is one of the most important and valuable lessons investors – and traders – alike can learn. The stock market is an anticipating
instrument. Investors pay for future earnings in the price of shares today. Those savvy investors that were in the homebuilding equities in advance of the
turn in housing profited nicely. It has worked much the same way with the overall markets as well. The dramatic rise in our indices this year is on the
expectation that revenues and earnings, while perhaps on the softer side now, will begin to look healthier going into 2014 and beyond. Most investors have
heard the adage “buy the rumor, sell the news”. It looks as though that is exactly what happened with the homebuilder equities that peaked in early 2013.
The only question now is when/if the same could happen in the broader markets. 2014 should prove to be an interesting year that may begin to answer this