Has the housing market and related exchange traded funds (ETFs) hit rock bottom yet? While some may think houses are as cheap as they will ever be, more pessimistic investors think the housing bottom still remains elusive.
People should not unequivocally trust the words of pundits who are hinting at a housing bottom, remarks Barry Ritholtz for The Big Picture. Ritholtz is still on the fence in regard to the timing and shape of an eventual housing low. He provides some arguments as to why we are not near a bottom in housing prices or activity, which include:
- Prices. Home prices on the national level remain elevated, which still remain around 15% above historic metrics. Ritholtz thinks prices will drop lower for the next minimum two to four quarters and real estate prices won’t be increasing much many years there after.
- The average. Prices could drop past the median as prices go back to historical means, which often occurs after periods of mispricing.
- Jobs. Unemployment will likely remain elevated and would translate into a smaller pool of potential homebuyers. Wages have also been flat, or negative in real terms, and this would hamper families from trading up.
- Foreclosures. Foreclosures are unlikely to abate. This will in turn reduce home prices. Loan Mods are also not working with a redafaulting rate in less than a year between 50-80%.
- Inventory. There is a large supply of “shadow inventory,” which flippers, speculators, builders and financers are sitting on in hopes of higher home prices in the future. It is possible that between 1.5 to 3 million are just sitting unattended.
- Psychology. After the dot-com collapse, the credit crisis and house prices losing about one-third off their high, total losses to the American family is around $25 trillion. This amount of loss has made everyone think twice about taking risks in the market.
- Credit/Debt. There are a lot of people with poor credit and too much debt, which usually impedes the process of buying a home. Banks are also tightening standards, such as requiring higher loan to values for purchases, better credit scores to get approved for mortgages and lower levels of debt servicing relative to income.
- Deleveraging. Americans are saving and deleveraging wealth, and the process is likely to continue as people become risk averse after taking so many hits to their bank account.
While relatively new, MacroShares provides a useful way to access the housing market with its two ETFs. The two ETFs are a good way to play your own perspective on the housing market. Whether the bottom is really here or not, watch the trend lines for potential opportunities.
- MacroShares Major Metro Housing Up (UMM)
- MacroShares Major Metro Housing Down (DMM)
For more information on housing, visit our real estate category.
Max Chen contributed to this article.
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.