By David Forest, editor, Strategic Investor
Last year, we predicted real estate would fall. We flat out got it wrong.
We said there were too many negatives working against real estate prices in the wake of lockdowns. We thought mortgage forbearance, foreclosures, and delayed evictions and listings would eventually catch up to the market.
Our prediction was a basic supply/demand problem. If a flood of supply hit the market and demand wasn’t there to greet it, that would be bad for prices.
However, we didn’t account for several factors. Historically, low interest rates lowered the average cost for home buyers. Lower rates mean you can buy a larger home for the same amount of money.
Homebuilders are also still playing catch up with the housing market. We can see this through the new housing starts data from the Department of Housing and Urban Development (HUD). This data shows the annual rate of new homes under construction each month.
While they’re hovering around their long-term average today, housing starts were well below that average for years. In fact, after the housing crash of 2007, they stayed below that average for over 12 years.
That’s driving prices higher because supply is still tight. Additionally, according to data from the St. Louis branch of the Federal Reserve (FRED), average 30-year mortgage rates are still hovering near all-time lows. Today, they’re right around 3%.
That means housing is still very affordable for most people.
We can measure this through the National Association of Realtors (NAR) housing affordability index. When the index is at 100, the average income can afford 100% of the average home price. Historically, this figure is around 130. Today, it sits at 151 even with home prices soaring.
That’s enough for us to believe that housing prices are heading higher.
But we don’t necessarily need all that data to predict what happens. The government is telling us prices are rising.
Last month, The Wall Street Journal reported the maximum size of mortgage loans eligible for backing by Fannie Mae and Freddie Mac is about to move much higher. And it’s all due to the rapid rise in home prices.
And the median price of a single-family home is continuing to climb. That’s also the reason Fannie and Freddie need to adjust their loan limits.
According to The Wall Street Journal, today, Fannie and Freddie can back single-family mortgages as high as $548,250 in most parts of the country. In more expensive housing markets, they can back loans up to $822,375.
Those limits may jump to $650,000 in most markets and up to $1 million in expensive markets.
So at the end of the day, the housing market is about to get another boost after a record year for home prices.
If you’re in the market for a home today, it’s a good time to buy. Mortgage rates are still near historic lows and houses are still affordable, as we said above. Plus, you get the bonus of a true inflation hedge, with inflation currently running at its highest level since 1982.
If not, one way to play this is through the S&P Homebuilders ETF (XHB). It tracks a basket of homebuilders, which should benefit with the tight supply (as shown in the chart).
Investors can also consider the iShares U.S. Home Construction Fund (ITB) as another way to play the trend.
The point is, there are several ways to approach the rise in real estate today. There’s not a one-size-fits-all approach. At the end of the day, when the government hands you the playbook, it’s best to ride along.
With that knowledge, we’ll check back next year to see if our prediction comes true.
Keep walking the path,
Editor, Strategic Investor