Be careful what you wish for. With home prices rebounding strongly, many investors are now starting to wonder whether we’re back in another housing bubble. Fortunately, I think the answer is no, although housing still poses a risk to the economy and markets, albeit for different reasons.
Starting with housing affordability, despite the recent gains it is hard to argue home prices are out-of-line with the fundamentals. Today, the median price for a new home is around $200k. While this is up by a third from the ’12 lows, home prices are only back to where they were in 2004. The situation looks even better after accounting for the rate environment. In the summer of 2004 a 30-year conventional mortgage was around 6%. Today it is roughly 4.5%. For this reason, housing affordability – an index tracked by the National Association of Realtors- is still close to the 20+ year peak reached in early 2012.
However, even without a crash, housing still poses a risk. Here are three ways housing can impact the economy:
Consumer Confidence – To some extent the recovery has been a confidence game. Rising consumer confidence has helped spur spending and support growth. During previous recoveries, this rise in confidence was mostly driven by an improving jobs market. Unfortunately, following this recession the recovery in the labor market has been lackluster, at best. Instead, consumers have become more confident as household wealth has risen. Between Q2 2012 and Q2 2013 household wealth increased by over 10%, hitting a nominal peak of nearly $75 trillion. Much of this is due to a rising stock market, but housing has also played a key role, particularly for lower and middle-income households where homes represent the majority of wealth.
Mortgage Refinancing – In addition to confidence, homes can also be a source of cash flow. While investors are no longer taking equity out of their homes, as they were for much of the 1990’s, lower rates allow home owners to refinance their mortgage, thus freeing up cash-flow for other spending. In recent years, the surge in refinancing helped support consumption, even as wage gains proved elusive. More recently, as rates have risen refinancing activity has slowed. An index tracking the volume of mortgage activity is down by more than 50% since September of last year.(...)Click here to continue reading the original ETFDailyNews.com article: How Real Estate Impacts The U.S. EconomyYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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