A deadly combination of market factors is raising doubt over the sustainability of of the past month’s surge in existing-home sales, an unexpected windfall largely driven by attractive lending rates and the federal first-time buyer incentive. Couple the uncertainty of the first time home-buyer credit’s future with a sobering job market, and a credit-stingy financial sector reeling from foreclosures, and the real estate picture is not as promising as recent gains suggest. For more on this, see the following article from The Street.
First, the $8,000 home-buyer credit, which has made purchasing a home for the first time a bit more affordable, is set to expire and will likely deter many from purchasing a home. Although some suggest that Congress will extend the tax credit, it will be difficult after a recent IRS audit of the program unveiled various fraudulent claims, including some trying to claim the credit for unpurchased homes and some not fitting the description of a first-time home buyer.
Secondly, the financial sector, especially banks, remains fragile. It appears that the amount of debt that is still outstanding in the economic system is taking its toll on the banking system. There has been a flood bank failures this year as the number has soared past the century mark. The uncertainty of the future repayment of loans to the banking sector and the surge in defaults, represented by real estate foreclosure rates, have tightened the credit markets and will likely remain a concern for the next 12 to 18 months.
Lastly, there is no real relief in the labor markets in sight. President Obama has said that unemployment is expected to continue to rise into 2010. Without a job and a secure source of income, a consumer will not be able to obtain a loan. Additionally, those who do have jobs are worried about pink slips and are not spending.
The real estate sector has seen a nice uptrend, primarily fueled by the one-time homebuyer tax credit and favorable lending rates. The is evident through the performance of the following equities: first, the SPDR S&P Homebuilders(XHB Quote), which is up 68% from its March low of $8.23. It closed at $13.83 on Monday.
Second, the iShares Dow Jones Real Estate(IYR Quote), is up 83% from its March low of $22.21. It closed at $40.61 on Monday.
When investing in these equities a good way to mitigate the risk that inherently involved is through the use of an exit strategy. According to the latest data from www.SmartStops.net , an upward trend in these ETFs could come to an end at the following price levels: XHB at $13.39 and IYR at $40.65. Keep in mind that these price levels change on a daily basis and updated data can be found at the Website.