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Healthy Housing ... But There's a Threat!

Tuesday, June 23, 2015
Money and Markets
You can also access this issue on our website.
Healthy Housing ... But Watch Those Rates!
Market Roundup
Dow +24.29 to 18,144.07
S&P +1.37 to 2,124.23
NASDAQ +6.12 to 5,160.10
10-YR Yield +0.05 to 2.41%
Gold -$7.50 to $1,176.50
Oil +$0.86 to $61.21

By Mike Larson

I predicted three months ago that we’d see a healthy spring selling season for housing. And boy is that forecast panning out!

Today, we learned that new home sales rose 2.2% from a month ago to a seasonally adjusted annual rate of 546,000 in May. That easily beat forecasts for 522,000. It was also the strongest reading in seven years.

Yesterday, we found out that existing home sales jumped 5.1% to a seasonally adjusted annual rate of 5.35 million. That was the best reading since November 2009, and it easily topped estimates for 5.26 million.

Median home prices also climbed almost 8% from a year earlier, while the “months supply at current sales pace” gauge of inventory sank to 5.1. That’s generally consistent with a modest sellers’ market.

New home sales rose, and sales of used homes also showed healthy results.

Funny thing is, the used home sales figures are actually even better than they look. That’s because the 2009 reading was bolstered by the imminent expiration of a federal first-time homebuyer tax credit. If you exclude that month, you haven’t seen existing home sales this strong in more than eight years.

Now those of you who have been following me for years know I was one of the biggest housing bears on the planet in the mid-2000s. I warned of a massive housing and mortgage market collapse well in advance, and advised subscribers to stay the heck away from anything and everything related to real estate.

It’s not all puppy dogs and unicorns today, either. Large student debt burdens and lackluster wage growth are still putting pressure on the first-time buyers segment. That’s prompting many people to keep renting or to buy cheaper property, such as condos or townhomes rather than single-family homes.

“Buyers are more willing to step up and buy.”

But as I told the Washington Post in an interview yesterday, conditions are definitely better than they were during the bust. The deep psychological and financial damage caused by the collapse has subsided, lending standards are ever-so-gradually getting easier, and buyers are more willing to step up and buy.

The biggest threat on the horizon? Interest rates. Long-term rates are rising fast again, with the 30-year Treasury bond yield hitting a nine-month high of 3.22% today.

Mortgage rates are rising right alongside. And if that rise gets more and more vicious, it’s going to crimp affordability and knock more marginal buyers out of the market.

If there’s good news for home sellers, it’s that the meat of the spring selling season is over. That means the timing of the rise isn’t as bad as it could have been. But don’t lose sight of the cost of financing – as a real estate stock investor, a home buyer, or a home seller. It holds the key to where the real estate market goes next.

Now, I’d like to hear from you. Are you having trouble selling a home, or are you finding willing buyers out there? Have you purchased recently yourself, and if so, what was your experience? How worried are you about the rise in interest rates, in terms of its impact on real estate? Let me know over at the website.

Our Readers Speak

Tick tock, tick tock. The clock continues to count down to zero in Europe, and conversation about what comes next continued to dominate over at the Money and Markets website.

Reader Steven had some fun with sports metaphors, saying: “Speaking of ‘Hail Marys,’ Greece now has Russia in its backfield with a proposed oil pipeline and possible terminal. To quote Yogi Berra, ‘It ain’t over ’til it’s over.’ This is more entertaining than summer baseball.”

Reader Nerdmedic zeroed in on the other motivations for keeping Greece in the European fold, saying: “I am inclined to place more weight on the geopolitical aspect than the raw economics. It seems to be a case of which stokes the greater fear: Continued bad behavior from Greece or having a Russian encroachment in the Mediterranean?

“To create a U.S.-centric context, how much would we be willing to pay Canada to not permit a Russian base in Nova Scotia? The European metric may be similar.”

Meanwhile, Reader Cynicman said the whole affair has gone on long enough. His take: “There is a German saying, and I wish that Frau Merkel and her associates would pay attention to it. It goes: ‘Better a frightful end than endless fright.’

“It ought to be obvious that this is heading toward bankruptcy and a Grexit from the Euro. Why postpone the agony when delay will only worsen the situation. Greece has no more chance of paying for its needless past spending sprees than John Calvin has of being elevated to Sainthood by the Catholic Church.”

One other topic also had you discussing the ramifications over at the website: The latest wave of potential health care mergers.

Reader Chuck B. said: “Anthem is making a bid for Cigna, as Mike mentions. It seems to be another case of government actions resulting in Big Businesses becoming even bigger, as they consolidate to deal with increased regulatory red tape. No doubt the merger will also result in a sizable number of workers losing their jobs, as mergers usually do.”

Reader Ted F. also discussed the negative fallout from more deals, saying: “How can tens of billions of dollars be financed without massive cuts and rate increases? The money going into the insurers comes from the people being insured, and being invested. The outflow comes from investments to pay the costs covered by the policies.

“Add in the money borrowed to pay for acquisitions, and it can only mean higher rates or less benefits. I can’t see where merging assets and combining operations will result in billions of dollars in savings needed to pay for this.”

Thanks for weighing in. Greece has very little time left, and things are clearly coming to a head. The key question for U.S. investors is how markets worldwide react to a deal, or the lack thereof. We should all know by Thursday or Friday at the latest.

And when it comes to mergers, Chuck B. is right on target. Health care regulation, red tape, and costs have gone through the roof as a result of all the policies coming out of Washington. So one of the unintended consequences is to prompt companies to merge and consolidate – great news for their shareholders, but bad news for all of us who have to shop for health insurance. Another mess created by dumb D.C. policies … what else is new?

Want to add your voice to the mix if you haven’t already? Then here’s the link to get you pointed in the right direction.

Other Developments of the Day

BulletGreek banks needed another 1 billion euros from the European Central Bank to keep their doors open today. That puts total “emergency” aid at 89 billion euros, with the last couple days of negotiations between Greece and its European creditors looming.

BulletEnergy stock investors got rich yesterday … at least those who owned the pipeline operator Williams Cos. (WMB). The firm owns a network of pipeline and processing facilities that help transport natural gas from wellhead to market, and Energy Transfer Equity (ETE) offered to buy it for $48 billion.

So far, WMB has rejected ETE’s advances. But that didn’t stop WMB shares from surging 26% to an all-time high on the assumption a deal eventually gets done. Many analysts (myself included) expect to see much more takeover activity in the energy patch, yet another way you can make money from the greatest energy bargains in three decades!

BulletThe U.S. women’s soccer team beat Colombia 2-0 yesterday in Edmonton. That puts the U.S. into the quarterfinals at the Women’s World Cup, where we will play China on Friday.

BulletWhen you watch a movie, how much attention do you pay to the sounds and music in the background? I’d argue in many cases, those sounds and songs help make the movie – raising the tension in a horror film, tugging at your heartstrings in a romance, you name it. Well, Hollywood just lost one of the industry’s greats. James Horner, 61, died in an airplane crash near Santa Barbara, California. The composer provided the music for countless blockbuster films, from Titanic to Braveheart to Field of Dreams.

So what do you think of the latest Greek bank aid? The U.S.’s success in the Women’s World Cup? The latest mega-merger proposal in the energy patch? Let me know over at the website.

Until next time,

Mike Larson

(P.S. Don’t miss the deadline for Charter Enrollment in Dr. Martin Weiss’ Ultimate Portfolio that expires this Friday, June 26. Click here to learn how you can still join at the lowest price ever offered until 4:00 PM Eastern Time this upcoming Friday!)

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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