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The recent surge in home prices is a reminder of the gains we saw at the tail end of the real-estate bubble five years ago.
But many people won’t want to look at it that way. Americans, after all, put so much stock in housing, they think that what’s good for the property market is good for the U.S.
The S&P/Case-Shiller Home Price Index for the top 20 metropolitan areas rose at an annual rate of 12 percent in April. That’s about three times the historical average and a huge turnaround from the roughly 20 percent rate of price declines we saw in the depths of the bust.
In fact, it’s getting close to the 16 percent or so peak rate of advances we saw just before the housing bubble burst. And some markets are even hotter — San Francisco, up 23.9 percent; Las Vegas, up 22.3 percent; Phoenix, up 21.5 percent.
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| Deep-pocket investors searching for yield are driving the surge in housing demand. |
Now, if all this were being driven by an incredible surge in demand from average buyers, I’d say this is great news for the economy. If job growth, wage growth or localized economic growth were up at double-digit rates, I’d be incredibly pleased. But only a portion of the demand driving price gains is from traditional homeowners.
What makes up the rest? Investors. We’ve seen a massive surge in purchases by deep-pocketed investors searching for yield. Figures from the National Association of Realtors show that roughly a quarter of homes purchased in 2011 and 2012 were bought as investments rather than by people actually planning to live in them. That investor share of the market is as high as we saw in 2005 during the real-estate frenzy.
That’s the exact same kind of demand that’s most threatened by rising interest rates. So that’s why I’ve grown increasingly cautious on housing over the past several months, compared with the cautious optimism I had a year or two ago.
What else makes me nervous? How about the 15 percent declines in copper and lumber this year? Those are key materials used in the construction of single-family and multi-family properties, and you’d expect those prices to be rising substantially.
Then there’s the reading we just got on June housing starts and building permits. Starts plunged 9.9 percent to a seasonally adjusted annual rate of 836,000 in June from 928,000 in May. That was far below the 960,000 expected by economists.
Permit issuance is a leading indicator of future construction, and it plunged too. Permits fell 7.5 percent to a 911,000 annualized rate, compared with forecasts for a reading of a million.
Now, in fairness, a lot of the weakness was concentrated in the multi-family sector — think 200-unit apartment buildings, condominium towers, duplexes and triplexes. But even single-family construction dropped to the lowest since November, and permit issuance appears to be leveling off.
As rising interest rates continue to bite, we could see a worse-than-usual seasonal slump now that the spring house-hunting period is behind us. So keep that in mind if you’re selling or buying a home.
What about the stock market? Can it handle a renewed downturn in housing? Well, many housing-sensitive stocks have already gotten pounded. After an oversold bounce, I expect them to head lower still. The emerging weakness could also prove to be a significant headwind for mortgage-sensitive banks.
As for the broader market, it depends on if other sectors can pick up the slack. Only time will tell, but I have been actively taking profits into the spring and July rallies because I’m increasingly worried about what lies ahead.
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
