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Is Housing on the Edge?

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Uncommon Wisdom Afternoon Edition
MARKET UPDATE
Index Price Chg %
Dow 15,567 22.19 0.14%
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S&P 1,692 3.14 0.19%
Gold 1,342 6.70 0.50%
Oil 107.0 0.09 0.08%
Uncommon Wisdom Afternoon Edition

July 23, 2013

Is Housing
on the Edge?

Mortgage-rate shock
bites into home sales …

  • Flipping is back in style …
  • Free Fed cash driving home sales? …
  • Chinese leader lost in translation …

Dear Jonas ,

The housing market is in the news this week. Because most real estate data reflects the past, we are just now starting to see the impact of Ben Bernanke’s “taper” talk.

Is the Fed helping or hurting homeowners? Today we’ll evaluate this question from several angles.

As I’ve explained to our readers a few times, currently real estate is the core of my long-term investment bucket. Recent stock market action has been very interesting with all of its volatility, but long-term investing in assets like real estate is just as important to pay close attention to.

Based on the feedback that I have received, I know many of our readers follow similar investment strategies. So, let’s dive into the numbers.

***

Monday’s Existing Home Sales report came out unexpectedly weak. Analysts expected to see June sales equivalent to a 5.27 million yearly pace. The report was only 5.08 million.

In other words, 262,000 fewer homes than expected will sell in the next year. This is bad news if your house is on the market. Results were consistent in all regions.

What happened? This report covers sales of existing single-family homes, condominiums and co-ops that closed in the month of June.

You know how it works. Deals closed in June are based on contracts signed in May, or possibly April in some cases.

What changed? The top factor is probably mortgage rates. They were just starting to move up in May — and really shot up after the mid-June Federal Reserve meeting.

Some of the June homebuyers probably had lower, previously locked-in loan rates. We can assume many did not. This could account for the lower-than-expected volume.

If mortgage rates are pricing people out of the market, this report will get even worse during the next few months. Watch closely if you’re in the housing market on either side.

Tomorrow brings a similar report on newly constructed homes. The consensus forecast is for an annualized 476,000 volume in June. We’ll find out in the morning if the analysts hit their target.

***

I’ve seen several reports of a “flipping” revival. Back in the good old days around 2004-’07, thousands of people worked full-time to buy, restore, redecorate and quickly “flip” houses at a profit.

I know a few former flippers. Some of them did very well for a few years. Then the lights went out.

Today the flippers include fewer self-employed individuals and more cash-flush investors. This is what happens after several years of Federal Reserve “stimulus” activity.

Remember what “quantitative easing” does. The Federal Reserve is buying mortgage-backed securities as well as Treasury bonds. All that new cash was supposed to trickle down to the housing market. The plan is working.

However … the benefit doesn’t always go to families with recession-damaged credit ratings.

QE is more evident in the giant pools of institutional cash. They use the Fed’s free money to buy vacant and foreclosed homes, hire a few hourly workers to repair them and then try to “flip” the properties for a quick profit.

If I were one of those institutions, I might be starting to worry. You can’t flip if no one wants to buy. Unsold inventories are still very high in many regions.

***

For most of us, the house where we live is more than just a building. Our homes are where families live together and build future memories. Home is not just another investment.

At the same time, our homes are an investment — the largest one for many families. Maybe the question here is: Is home a good investment?

We all have to answer that question for ourselves. Despite what builders and agents tell you, you can live the American Dream without buying a house. True, tax policies and social pressures encourage home ownership. This is beginning to change — and it matters to everyone.

In purely financial terms, your home is worth the amount of money someone will offer when you are ready to sell. If that day is years from now, you are betting events will line up in your favor between now and then.

If you don’t plan to move anytime soon, the monthly payments may be more important than your home’s estimated resale value. My advice: Live at whatever level of comfort you can realistically afford … and make sure you have a cushion!

More importantly, be very careful with investing on the idea the housing market is in full swing again … it’s not.

Based on today’s numbers, investing in a big rebound is a big risk, and you should wait until you see the Existing Home Sales report indicate more strength. Once it shows that the housing market has returned to sustained growth, then you can think about more-aggressively investing your long term capital into housing.

***

Speaking of other short- and longer-term investing strategies …

Your Uncommon Wisdom editors don’t particularly enjoy being on camera. They’re definitely behind-the-scenes guys who are happiest when they are researching, tweaking their trading models and generating winning trade opportunities for their subscribers.

But they all eagerly joined together when I asked them to answer your most-pressing questions on gold, the Fed, tech, energy and more in our “Fight the Fed?: Emergency Summer Volatility Summit.”

Tony Sagami even flew in from Thailand, James DiGeorgia dialed in from his family vacation and Rudy Martin tore himself away from his trading screens in Miami to be here for what I believe turned out to be an incredibly informative and actionable investing event!

However, in just a few hours, your opportunity to watch the timeliest, most-important summit Uncommon Wisdom has hosted this year will be gone forever. That’s because we’re taking this video offline tonight at 11:59 p.m. Eastern.

I hope you’ll give it a watch before it comes down … this was the first time we’ve had the team all together in one “room” since James joined us last month, and I really enjoyed seeing everyone interact and share ideas for the benefit of you, our readers.

We’ve gotten some great feedback about the summit, asking for us to get the guys together like this again. I’m sure we will but I do hope you’ll catch this very timely event because, for being unscripted and off-the-cuff, it couldn’t have gone better or been more chock-full of actionable information.

Click here for your last chance to view this “Fight the Fed?” Q-and-A session here now!

***

Also in the news today …

  • Apple (AAPL) shares drifted lower in today’s trading. But when the iRetailer announced estimate-beating quarterly results after today’s close, shares quickly gained more than 4%. Although iPad and Mac sales slipped, iPhone sales came in even better-than-expected.
  • China Premier Li Keqiang caused an overnight stir when media reports quoted him as saying economic growth below 7% is “unacceptable.”
  • Of course, the premier did not actually say the word “unacceptable.” He was speaking in Chinese. Knowing a bit of Chinese myself, I have come to realize the Chinese word for “acceptable” takes on a lighter tone in China and much-stronger tone in other countries that use Chinese as well.
  • Early (English-language) reports used much-angrier translations of the Chinese word to mean “will not be tolerated.” The tone softened as the day progressed. So, we are all curious here at Uncommon Wisdom Daily what the Chinese leader will do to prevent “unacceptable” growth going forward.
  • Aside from the earnings deluge and housing reports, other key economic data is coming this week.
  • Tomorrow is the Purchasing Managers’ Index, Thursday brings Durable Goods orders and weekly jobless claims, and Friday we get a peek at Consumer Sentiment. I’ll let you know if any of the reports are remarkable.

Good luck and happy investing,

Brad Hoppman
Publisher
Uncommon Wisdom Daily

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