Weak Housing Market Affects Stock Market

The National Association of Realtors (NAR) expected the home prices to finish down for the year, which would be the first drop since 1968. Single-family homes are expected to decline by 1%,to $219,800. The number of home sales is also expected to dip from 6.48 million in 2006 to 6.29 million in 2007, a drop of 2.7%. Experts believe speculative investing in real estate is not going to work any more and buyer should be in for long-term. In 2008, NAR is forecasting price gains of 1.4 % for existing homes and 2.2 % for new homes. NAR also expects interest rates, currently at about 6.16 % for a 30-year fixed-rate loan, to rise gradually to about 6.5 % by the Q4.

Subprime Lending Industry
Subprime lending industry has added to the declining home prices. High foreclosures and forced sales all add up to the already increasing inventory, expectedly hurting the real estate industry. Loan originators are tightening up lending standards this year in response to increasing defaults among subprime borrowers. This makes it even more difficult for buyer to buy homes, subsequently weakening demand for housing market.

Walls Street
Wells Fargo (WFC) has put a ban on risky lending practices where big financial institutions and investment firms have bought home loans in bulk from banks and other lenders and bundled them into securities to be sold to investors, theoretically spreading risk and helping provide more funds for lending.

Toll Brothers (TOL) reported increase in the rate of cancellations. The Q2 cancellation rate was 19%, up from 9% a year ago but still easing from 30% in Q1.

More on Foreclosures
Rising foreclosures will bring misery to many home owners but bargain prices for some lucky home buyers. Many real estate auctions market more than 500 foreclosured properties in a span of a week. Few homes will go for less than $5,000. Although many of the sales this year have clustered in the economically hard-hit Midwest, many of the homes coming to auction later this year will be higher-end properties such as California, Texas and Florida.

Below is a Heatmap, showing the foreclosure filings on a per capita basis. Darker the red color, the more per capita filings there are.

Real Estate Foreclosure Filings

foreclosure_rate_heat_map

(Source: RealtyTrac)

Colorado leads the nation, followed by Nevada, with Texas and Florida not too far behind. In Colorado there were 9,254 foreclosures in Q1’07, vs. 28,453 foreclosures during all of 2006. Foreclosure filings in Colorado increased 31% from 2005-2006 and 110% between 2003-2006. Barring major changes in economic conditions, foreclosure filings in Colorado could increase to approximately 36,000 for 2007. Florida posted 12,049 pre-foreclosure fillings in April, with another 3,364 auction filings and 2,370 bank-owned real estate filings.

Conclusion: The foreclosure rates are heating up, directly affecting the housing market. Investors see weak housing market as a sign of weak economy. Weak housing market directly or indirectly affects the stock market. It directly affects home builders, lenders, mortage companies, realtors and REITs. It affects retail, services, materials, wood, transportation and many other industries indirectly. Investors should therefore factor the housing market before investing in the stock market.

  • Tightening lending standards is a good thing for the market because it will help prevent (but not stop) unethical loan officers from preying on naive buyers. It’s hard to say no when someone tells you the house you thought it’s impossible to buy is now in your reach.

    Buying foreclosures is tough, though, because it requires a lot of upfront preparation. Many foreclosure sales require the price to be paid in cash. And if you want inspections, they have to be done beforehand. A lot of lenders are turning to short sales instead of foreclosures.

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