Housing Market Making A Short Term Bottom

It looks like housing prices may find a short-term bottom this year, assuming a stable low interest rate environment. The primary reason that I’m saying this is because of an ultra-low inventory of homes on the market, about some 30% to 40% lower than last year or the year before. Furthermore, there are a couple of programs that may reduce the number of foreclosures or short sales to come to the market:

1. Bank of America converting foreclosures to rentals to delinquent borrowers.

2. Fannie Mae implementing bulk sale of REO to investors to convert to rental.

The bottom line is that in majority of the US housing markets, it is becoming cheaper to own than to rent at the prevailing mortgage interest rate. This is bringing many big or mom-and-pop investors to invest in the housing market. However because of the low interest rate, I do NOT believe that this will be the final bottom before a sustainable rise. Eventually, the real bottom will be made near the peak of a bond market interest rate. With a rising stock market for the next several years, the mortgage interest rates will be rising as well, putting a cap over whatever advances that the housing prices can make.

If you want to invest, make sure that it is both net P&L positive and cash flow positive on a 30-year fixed rate financing. The action of mortgaging will reduce the potential impact from the downward pressures of the falling bond market and therefore the rising of interest rate. With a rising rental market everywhere, it is a good time to invest in real estate as long as you can make the math works.

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