Home prices are set by the price a buyer is willing to pay. When this agreement is met, a home sale occurs. As buyers reduce their desire to purchase a home, whether due to loss of a job or other economic stress such as higher interest rates, then home prices fall. Home prices are essentially based on two major determinant: income levels and interest rates. The higher the income level and lower the interest rate, the higher home prices will move up. Conversely, if the opposite conditions are present, then home prices will fall.
Home prices are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers.
The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing.
What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices.
The S&P/Case-Shiller index, comprising the 20 largest U.S. metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.
Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.
My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying … Read More
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
Stocks are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher.
The end result is that the overall wealth and optimism in America is higher.
According to the “CNBC All-America Economic Survey,” 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number is up from 31% in November and it’s the highest since December 2009. (Source: Liesman, S.,“CNBC, American Dream Is Back; CNBC All-America Economic Survey,”CNBC, March 26, 2013.) So all is good, right?
As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires werecreated from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “CNBC, US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 14, 2013.)
But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don’t care about the stock market rally.
While the media’s headlines are commenting on how America is becoming richer, it’s a myth, of course—unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
In my view, the growing disparity between the rich … Read More
As the rebound in home prices continues, many people are trying to determine what the best investment strategy is at this point in time.
Let’s take a look at what has happened and what is most likely to occur in the future for home prices to help create a long-term investment strategy.
At the end of 2012, due to the increase in home prices across the nation, 1.7 million homeowners, who were underwater (meaning their mortgage was worth more than the value of their homes) a year ago, had positive equity, according to CoreLogic. (Source: Gopal, P., “U.S. ‘Underwater’ Homeowners Regain Equity as Prices Rise,” Bloomberg, March 19, 2013.)
The rise in home prices continues, as January saw a 9.7% increase over year-ago levels. According to CoreLogic, if home prices rise by five percent more, an additional 1.8 million homes will return to positive equity.
Clearly, there is no doubt that the proper investment strategy over the past year has been to gain exposure to the real estate market, as home prices have increased substantially.
Part of the rise in home prices is due to institutional investors who also have foreseen this investment strategy and have set out to purchase thousands of homes to convert into rental units. Because of the low yields on government bonds, many institutional investors are attracted to the high margins from renting units out as an investment strategy.
As I’ve mentioned in these pages several times before and when the stock was trading much lower, The Blackstone Group L.P. (NYSE/BX) is a great company that has aggressively bought in excess of 20,000 single-family homes and … Read More
Federal Reserve Chairman Ben Bernanke testified in front of Congress and faced a barrage of questions and criticisms regarding the central bank’s monetary policy initiative.
There are a growing number of critics voicing their concerns over the current monetary policy path set forth by the Federal Reserve. These critics aren’t only independent analysts such as myself, (I have been writing articles on the topic for some time now, including the article “Current Monetary Policy Unsustainable”), but economists who have worked closely with the Federal Reserve in the past.
The Federal Reserve chairman stated in his testimony to Congress, “Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods.” (Source: “Bernanke Affirms Bond Buying,” Wall Street Journal, February 26, 2013.)
Is he correct? Over the short term, the answer is yes, since the Federal Reserve has begun its aggressive monetary policy plan, home prices have gone up and car sales are strong once again. The real question is: what are the costs of accumulating $2.8 trillion of Treasury debt and mortgage-backed securities?
The real issue I have is the belief in fixing a burst bubble with yet another inflated stimulus plan. The previous high level of home prices was artificial and not sustainable. The resulting housing crash was inevitable, as all of the factors that went into creating the bubble were not structurally sound.
With the Federal Reserve pumping out monetary policy at full throttle, home prices are sure to move upward over the short term, but the long-term implications can be quite … Read More