Yahoo Finance How Does a Tight Inventory Affect Home Prices?
Home Prices Continue to March Upwards: Key Investor Takeaways
Prices continue to climb
In February 2016, the FHFA (Federal Housing Finance Agency) reported that home prices grew 0.4% month-over-month and 5.6% year-over-year. Home prices have eclipsed their April 2007 peak and are hitting new highs.
A tight real estate market is driving prices higher. The latest Existing Home Sales report shows available inventory at 4.5 months and a market tilted heavily in favor of sellers. A balanced market is considered to be around 6.5 months’ worth of inventory. In localities such as San Diego, California, the inventory is at about two months. The number of pending home sales is higher than the number of homes available for sale—an almost unheard of state of affairs.
What makes the FHFA House Price Index different?
The FHFA’s House Price Index differs from other house price indexes, including those from Case-Shiller and Radar Logic, because it only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac.
This difference means that home prices are below the conforming threshold of $417,000. It also means that the borrower has a mortgage that eliminates cash-only transactions. This eliminates a lot of the bidding war transactions we’ve seen in the hot markets. Finally, the FHFA House Price Index eliminates jumbos. This makes it more of a central tendency index.
The FHFA House Price Index is the first major house price index to get back to its prior highs. Other indexes, including Case-Shiller’s, show that we’re still about 11% below the peak levels.
Implications for REITs and real estate companies
Rising real estate prices are good for real estate securities owned by real estate companies such as Colony Capital (CLNY) and NorthStar Realty Finance (NRF). These companies aren’t like Annaly Capital Management (NLY) or American Capital Agency (AGNC). Whereas the latter two primarily invest in agency- or government-insured, mortgage-backed securities, the former two take the credit risk. If the borrower defaults, they’re stuck with the collateral.
Investors interested in trading the real estate sector through an ETF could look at the iShares Mortgage Real Estate Capped ETF (REM). If you want to isolate interest rate risk, you could consider the iShares 20+ Year Treasury Bond ETF (TLT). In the next part of this series, we’ll look at how housing prices are approaching peak levels and what that means.
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