Many analysts consider the housing market to be a leading indicator of the health of the U.S. economy, but the bigger question on exchange traded fund (ETF) investors’ minds is “Have we hit the bottom?”
Federal Reserve Chairman Ben Bernanke said yesterday that he sees a bottom in the housing slump, but he also warned that any other jolts to the financial system could put a crimp in our recovery efforts. His assessment is based on the view that inventory liquidation will slow over the next few quarters.
But there are those who believe that no, the economic data does not support the idea that we have hit a bottom. Metrics used to measure this include:
- Median income vs. Median home price
- Ownership costs vs. Renting costs
- Market value of housing in relation to GDP
- Housing inventory and supply vs. Sales rates
Although housing prices have deflated, the metrics have not come down to typical levels, says Barry Ritholz for The Big Picture. There are three main reasons for this:
- Asset classes which become wildly over-priced, such as what happened in the housing market, do not merely revert to the mean — they tend to drop below the mean, eventually becoming significantly under-valued.
- Job losses and income decreases lead to more distressed sales, with prices especially pressured. Falling prices make put mortgage holders under water — holding homes worth less than the mortgage. The recession has created a self-fulfilling cycle.
- Factors outside of housing prices and interest rates are in the red. These include employment, lack of down payments, debt ratios of applicants, damaged credit for a lot of consumers, and non-purchase costs have risen substantially ie., property taxes, repair and maintenance and energy.
Although pending home sales were up last month, the majority of those were foreclosures. The other economic factors must mend before housing can make a clean recovery.
When following the trends, there’s no need to try and call a bottom. Instead, wait until there’s a clear uptrend before considering whether a position is a good one for you.
- First Trust S&P REIT Index Fund (FRI): down 11.6% year-to-date
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.