Many of you have asked about the U.S. housing market both in terms of investing and in terms of managing mortgage debt. I encourage caution with direct investment into sector for most.
James Krapfel of Morningstar summed my views up well in an interview August 13th.
Here’s part of it,
Rising Rates & Housing
“We cite three main sources of risk for the housing market. One is investors pulling back from the marketplace. The second is the looming foreclosure inventory, which we think is overstated. And the third are higher mortgage interest rates, which we believe is a key consideration. . . affordability.
Interest rates started to move higher in May after the Fed indicated its plans to slow down purchases of residential mortgage-backed securities. The 30-year fixed rate rose from 3.4% the week of May 3rd to 4.5% on August 13th.
DR Horton (DHI) said it saw buyer interest ebb in mid-May as interest rates rose, and that continued through June and July.
But in a historical context, affordability is still very strong based on two primary indicators: mortgage payments relative to income and mortgage payments relative to rent.
. . to normalize to average 1990s levels, 30-year fixed rates would need to rise to 7.1% or median home prices would need to rise an additional 26%.
The third measure that we track is housing relative to income. Here, we view home prices as expensive relative to historical levels. So, on balance, we believe that home prices are slightly undervalued, probably by around 5%.”
James Krapfel – Morningstar 8/13/2013
If you’re carrying an adjustable rate loan, let’s discuss strategy and, when looking at investing in housing or homebuilders, always remember that their narrow focus will bring greater risk than investing more broadly across numerous sectors. Mortgage services are not available through LPL Financial or The Linkous Group, Ltd. The above commentary is opinion and should not take the place of specific and tailored investment advice.
Have a great week,
Susan R. Linkous
Securities offered through LPL Financial
Member FINRA and SIPC