Is the enthusiasm for the real estate market built on a solid foundation? Existing home sales fell in March to its lowest pace since July of 2012. Worse yet, sales have declined for seven out of the previous eight months, ever since the the Federal Reserve signaled its intent to slow the pace of its treasury-bond purchases.
Surprisingly, a number of media reports have accentuated the positives. For example, the rate of declining home sales has slowed. Some economists interpreted this fact as a sign of stabilization. Others continued to blame the unusually harsh winter weather for the past while simultaneously expressing optimism for the spring and summer buying seasons. Still others emphasized a modest uptick in builder sentiment.
All is certainly not well with real estate, however. The fact that the average 30-year fixed mortgage is a full percentage point higher than a year ago coupled with a double-digit year-over-year increase in asking prices severely strains affordability. In fact, the primary reason that the pace of declines has slowed in the first place is the quarter-point dip in 30-year mortgages from 4.55% to 4.3% in 2014.
The drop in interest rates in 2014 may have helped to slow the rate of decline in home sales, but it has not boosted the share prices of home construction companies. SPDR Homebuilders (XHB) and iShares Home Construction (ITB) are underperforming broader U.S. benchmarks.
Bear in mind that the building sub-segment is one of the only rate-sensitive areas that has failed to excite investors in 2014. ETFs for other rate-sensitive investments like SPDR Select Sector Utilities (XLU) and Vanguard REIT (ARCA:VNQ) have outperformed the broader benchmarks, not underperformed them.
Homebuilders are already faltering at the real estate altar. What’s more, if lending rates actually rise into the fall, one should not expect things to get any easier for the struggling sub-sector.
On the flip side, what if banks actually began to loosen their lending standards? Buyers might find themselves chasing to get in the game by serving up smaller down payments. In fact, some folks see signs that banks have already loosened the reins. Roughly 17% of today’s purchases (excluding FHA mortgages) occur with less than ten percent down — the highest level since 2008.