Is the housing market on the verge of recovering? Is it recovering already? If you're not sure whether you believe the economists and pundits who think they can see the future, here are some tools that will help you make up your own mind.
In Pictures: 5 Simple Ways To Invest In Real Estate
Pending Home Sales
According to the National Association of Realtors, pending home sales, or the number of homes that are under contract and in the process of selling, rose by 8.2% in February (the most recent month for which data are available). The index is also an encouraging 17.3% over what it was a year ago.
Pending home sales are considered a leading indicator, meaning that they can forecast the direction the economy is headed. Leading indicators cannot truly predict the future, though, so they should be taken with a grain of salt. (To learn more about leading indicators, read Leading Economic Indicators Predict Market Trends.)
The increase in pending home sales could be less indicative of a genuine improvement in the housing market, however, and more indicative of the pending expiration of the homebuyer tax credit, which requires homes to be under contract by April 30. (To learn more about the homebuyer tax credit, read Claim the Homebuyer Tax Credit Before It Expires.)
Housing starts are an important leading indicator of not just the housing market, but the economy as a whole, because people are more likely to start new residential construction projects when things are looking good. Housing starts don't look promising right now - the U.S. Census Bureau reported that privately owned housing starts in February were 5.9% below January and 0.2% above February 2009. (Learn more about housing starts in Economic Indicators: Housing Starts.)
New and Existing Home Sales
New home sales reached a record low in February with 308,000 sales, according to the National Association of Home Builders (NAHB). In 2005, 1,283,000 new homes were sold per month on average. The good news is that new home sales increased by 20.8% in the West, one of the regions hardest hit by the housing crisis.
More good news comes from statistics on existing home sales. About 5 million existing homes were sold in February, up from about 4.7 million a year ago. (For more on this subject, read Economic Indicators: Existing Home Sales.)
Home inventory is another leading economic indicator. A greater supply of homes-for-sale indicates weak market conditions. The NAHB also reported that as of February 2010, there were 236,000 new homes, or 9.2 months' supply, on the market, the worst number since May 2009. There was also 8.6 months' supply of existing homes on the market, the worst number since August 2009. However, these numbers are better than those from a year ago, when the supply was 11.1 months for new homes and 9.7 months for existing homes.
The National Association of Realtors reports that in February 2010, the median price of an existing home in the United States was $164,300 and the average mortgage rate was 4.99%. With median family income at $60,498, a family's housing payment would only be 14.2% of its income, well below the 25% cap many financial experts recommend for keeping the monthly budget under control.
Compare these figures to 2007 averages, when a house cost $217,900, mortgage rates were 6.52% and median incomes were about the same at $61,173. While falling home prices aren't good, improved home affordability could help the recovery by putting home ownership within reach for more families, especially the first-time buyers who have historically helped end housing slumps.
However, credit is still difficult to obtain, and unlike investors, most families can't buy homes without a mortgage. What's more, despite how far prices have fallen, there are still plenty of people in high-cost-of-living cities who can't afford to buy anything.
The Mortgage Bankers Association (MBA) issues its Weekly Mortgage Applications Survey that reports on the number of people applying to borrow money to buy a house. For the week ending April 9, mortgage applications declined by 9.6% over the previous week. The four-week moving average, which is helpful in smoothing out the ups and downs of the weekly figures, was down 6.2%. The MBA stated that an increase in mortgage insurance premiums for FHA loans, which are attractive to buyers because of their low down payment requirements, may have contributed to this decline.
Mortgage Interest Rates
For the week ending April 9, the MBA reported that the average contract rate on a 30-year fixed-rate mortgage was 5.17%. Mortgage rates have been at historic lows for months, wavering between 5% and 6%. Low mortgage rates help entice buyers, but they can't fix a bad housing market on their own. The Consumer Confidence Index, a survey of how optimistic or pessimistic people feel about the economy, has been up and down in 2010, and consumers still feel pessimistic about the job market. The thousands of Americans who are unemployed couldn't get a mortgage even if rates were 1%. (For related reading, see Consumer Confidence: A Killer Statistic.)
Real Estate Mutual Funds
According to Morningstar, real estate mutual funds returned 9.4% in the first quarter of 2010, one of the highest return of any mutual fund category. Over the last year, they have also led all mutual funds with a gain of 105.3%. Shares of Vanguard's REIT ETF (VNQ), which invests in a wide range of real estate companies, gained 10% in the first quarter of 2010 and over 69% in the last year. These returns show investor confidence in the overall real estate market.
REITs are not limited to investing in the residential housing market, however; VNQ's largest holdings, for example, include Simon Property Group, which owns numerous shopping malls; Vornado Realty Trust, the owner of many office and retail buildings; and Public Storage, the well-known storage unit rental company.
Major housing market indicators currently provide mixed signals about how the housing market is doing. High unemployment rates, the continued difficulty of obtaining credit and the pending expiration of the homebuyer tax credit make it hard to tell where the housing market is headed at the moment. Keep an eye on these indicators and wait for clear and consistent signals to emerge before you consider the housing market to truly be recovering.
Don't miss what's happening this week in the financial world. Check out Water Cooler Finance: Buffett's Bank Fraud And Financial Eruptions.
Mutual Funds & ETFsLearn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
Fundamental AnalysisReturn on net assets measures a company’s financial performance.
ProfessionalsA look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
Investing BasicsDiscover the best websites for finding valuable properties that can earn you income.
Mutual Funds & ETFsLearn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
Mutual Funds & ETFsTake an in-depth look at the Vanguard Global ex-U.S. Real Estate ETF, an international property fund tilted toward Asian markets.
ProfessionalsAre hedge fund ETFs right for you? Here's what investors need to consider.
EconomicsUnderstand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
Home & AutoEvolving Swiss property laws mean that Swiss ski chalets have become precious commodities – and excellent investments, even if you're not British royalty.
Home & AutoThe pros and cons of hosting short-term rentals in your home.
A security with a price that is dependent upon or derived from ...
A REIT is a type of security that invests in real estate through ...
A type of investment issued by the Government National Mortgage ...
A form of securitization whereby single-family residential mortgages ...
A short- to medium-term debt instrument that offers a potentially ...
A financial instrument whose value is based on the value of another ...
Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
Typical leasehold improvements include partitioning a large, open space into smaller, more structured areas such as dressing ... Read Full Answer >>