By Kevin Grewal
As the economy starts to show signs of a self-sustaining recovery, many have suggested that the real estate markets have bottomed out, but there are plenty of signs to indicate as uphill battle still lies ahead.
From an optimistic view, real estate is still relatively affordable, consumer spending is trending in the right direction, real disposable income is on the rise, consumer confidence is at a three month high, new home construction is low and home sales are improving. These are all positive factors for the real estate markets, influence supply and demand forces and generally push prices up.
However, it is more likely that foreclosures and the demise of government funding will put a damper on these positive factors, further hinder the real estate markets.
According to the National Realty Association, there are more than 2 million homes currently in the foreclosure process and some real estate experts suggest that an additional million or two will likely follow in the coming months. With this in mind, banks are likely to flood the market with these homes pushing inventory levels up and producing more than ample supply.
As for the government, the Fed is likely to increase the federal funds rate and exit the mortgage-backed securities program in the first half of 2010, which is expected to result in a significant increase in mortgage rates. Many suggest that the Fed’s purchase of mortgage-backed securities is one of the major driving forces propping up the real estate market.
Additionally, the first-time homebuyer tax credit, which was recently extended, is set to expire early next year and further take away an incentive to purchase a new home.
In a nutshell, the real estate markets are much healthier than they were a year ago and are trending in the right direction, but both macroeconomic and microeconomic factors suggest that prices will likely decline before seeing any significant increases.
Some equities that illustrate the upward trend in real estate that could be influenced by these forces include:
• the SPDR S&P Homebuilders (XHB), which is up 87% from a March low of $8.23 to close at $15.35 on Monday.
• the iShares Dow Jones US Real Estate (IYR), which has more than doubled from its March low of $22.21 to close at $47.43 on Monday.
• the UltraShort Real Estate ETF (SRS), which enables investors to play the opposite direction of the real estate market and is down 93% from its peak in March to close at $7.04 on Monday.
When investing in these ETFs, it is important to understand the inherent risks involved and use an exit strategy to help mitigate these risks. According to http://www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points: XHB at $14.96; IYR at $44.82; SRS at $6.84. These price points change as market conditions fluctuate and updated data can be found at http://www.SmartStops.net.