Don’t Believe the Hype, This Is Where the Housing Market Is Actually Headed

Sales of new homes in May were recorded at a seasonally adjusted annual rate of 476,000. That was 29% higher over the same period a year ago and an improvement of 2.1% over the previous month. (Source: U.S. Census Bureau, June 25, 2013.)

The S&P/Case-Shiller index of home prices in the U.S. housing market increased 12.1% in April from a year ago. This was the biggest increase since March of 2006. In the prior month, March, the index showed home prices in the U.S. housing market climbed 10.9%. (Source: Bloomberg, June 25, 2013.) This index has been showing a robust increase since early 2012.

Can the housing market keep improving at this pace?

Dear reader, home prices increasing in the housing market is just one step in the right direction, but it’s not the destination. As it stands, I see home prices getting derailed from their upward trajectory before long.

Keep in mind that these housing market statistics are actually from the past. Consider that the S&P/Case-Shiller index is actually a three-month average and that its April numbers were strongly influenced by data compiled in February and March.

On June 19, a lot changed for the housing market’s future—the Federal Reserve said it will pull back on its bond purchases.

As a result, the U.S. bonds saw their yields skyrocketing. This phenomenon led to hikes in the mortgage rates. For example, 30-year fixed mortgage rates have gone up more than 32% since the beginning of May alone, and they appear to be continuously increasing. The 30-year mortgage rates were hovering around 3.4% in early May, and now they are beyond 4.5%. (Source: Bankrate.com, last accessed June 26, 2013.)

On a recent note; the Mortgage Bankers Association (MBA) reported that the number of mortgage applications filed in the U.S. housing market declined three percent for the week ended on June 21 from the previous week. In the same period, it also reported a decline of 67% in home refinance applications—the lowest level since July 2011. (Source: MarketWatch, June 26, 2013.)

Not only do rising mortgage rates mean homes will be less affordable for already struggling Americans, but it may also drive away new buyers from entering the housing market.

I still remain skeptical about the rise in home prices in the U.S. housing market. I continue to stand by my belief: easy money and investors rushing to buy in bulk have made thee U.S. housing market look “hot.”

But in reality, first-time home buyers—those who buy a house to live in it—are the actual indicator of real recovery in the housing market. If you think you missed out on the homebuilder stocks and are thinking of getting into them now, I’d think twice about it. The Dow Jones U.S. Home Construction is down 18% since mid-May, while the broader market is down only 2.5% during the same period. The homebuilding stocks themselves are telling us something is up in the housing market, adding credence to my skepticism of the so-called “housing recovery.”

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