My wife and I sold two condominiums near the tail end of 2005. We could not justify owning residences that were 40% more expensive to own than to rent. Simply put, it was time to cash in.
Due largely to my comfort with the liquidity of market-based securities, I did not wade back into the real estate investment waters until 2012.
Here in 2014, the inevitable nature of change inspired my wife and I to list our primary home. As a home seller this time around, however, the decision to sell has had little to do with a looming real estate bubble. My 18-year-old daughter is heading off to college. Our half-Papillon mix passed away. And we do not feel the need for the same amount of living space.
Although I have highlighted the dramatic decline in home sales in column after column over the last year, I have never expressed a feeling that property values had ascended to exorbitant heights. After all, price-to-rent ratios are relatively reasonable. The 30-year fixed has actually pulled back from 4.5% to 4.2% since the start of 2014. Meanwhile, the combination of demand for fixed income coupled with Federal Reserve guidance as well as geopolitical uncertainty should keep rates attractive for homebuyers.
So where are those upwardly mobile homebuyers in an environment where unemployment continues to decline? Understanding that all real estate is local, why has my home experienced a mere handful of visitors after 30 days on the market? Moreover, if the housing recovery is genuinely on solid ground, why on earth are home builders in the SPDR S&P Homebuilder ETF (XHB) down 9.3% year-to-date?
The answer is threefold. Families have less purchasing power than they did in 2009, financial institutions are making mortgages difficult to obtain and the year-over-year increase in mortgage rates is making it challenging for many would-be buyers to qualify.
The implication for equities is not necessarily straightforward. Granted, consumer stocks in SPDR Select Consumer Discretionary (XLY) are weaker than the broader U.S. stock pool. What’s more, the limited contribution of mortgage servicing dollars as well as the volume of market-based trading is adversely impacting banks in the SPDR KBW Bank Index (KBE). This exchange-traded tracker is down 2.1% this year and has been flirting with a technical downtrend.
Nevertheless, U.S. stock ETFs that have maintained momentum over broader stock benchmarks this year have refused to give up without a fight. Institutional money managers have be regular “buyers on weakness” of funds like iShares DJ Energy (IYE) and SPDR Select Basic Materials (XLB). Whether the interest in energy and basic materials is a function of a pick-up in emerging market growth or tied to late-stage business cycle investing may be less important than the fact that the sector winds remain favorable.
Considering the plethora of diverse economic data points, expect the U.S. Federal Reserve to talk out of both ends of its collective mouth. Yellen will emphasize that the recovery remains on track to warrant the cessation of quantitative easing in October. In the same breath, they will acknowledge a variety of trouble spots that require the seemingly endless policy of zero percent interest rates. Raise rates sooner? Not going to happen – the housing market’s sales woes provides enough cover there. I would sooner anticipate rates remaining at 0% for the entirety of 2015 than join the camp that believes a rate hike will come in the 2nd quarter of next year.