Profiting on Existing U.S. Home Sales Whether They Soar or Sour

By John Whitefoot

When it comes to the U.S. housing market, everything may look perfect on the surface, with homes being swept up at a rapid pace. However, this could all fall apart with the answer to one simple question: do existing-home sales numbers signal continued strength in the U.S. housing market and housing market-related stocks?

U.S. existing-home sales climbed 1.7% month-over-month to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July. The year-over-year numbers are even more staggering, up 13.2% over the 4.84 million level in August 2012. While U.S. housing market sales are at their highest peak since February 2007, they are also above year-ago levels for the past 26 months (June 2011). (Source: “August Existing-Home Sales Rise, Limited Inventory Continues to Push Prices,” Realtor.org, September 19, 2013.)

Unfortunately, for many reasons, the party in the U.S. housing market might be short-lived.

In January, the interest rate on a 30-year fixed mortgage was around 3.41%; today, it’s 4.55%. While one percentage point might not sound like much, it translates into an increase of more than 30%. With mortgage rates on the rise, many first-time home buyers fear that affordability will be out of reach. (Source: “Average Mortgage Rates: January 2013,” MortgageNewsDaily.com, last accessed September 19, 2013.)

In an effort to do a runaround on rising interest rates, many first-time home buyers are jumping into the housing market. While interest rates are on the rise, it’s important to remember that they’re still well below the 6.48% level offered in August 2008, just before the housing market crashed. Still, the rise in interest rates was enough to help propel August’s U.S. housing market numbers.

It’s also important to note that August U.S. home sales take into account contracts signed in June and July, when mortgages were on the rise. Buyer traffic dropped significantly in August, pointing to weaker existing U.S. housing numbers throughout the autumn.

Even though existing-home sales in August were up 1.7% month-over-month, it looks like first-time home buyers are still having difficulty climbing onto the property ladder. Just because interest rates remain low doesn’t mean they can qualify for loans.

First-time buyers made up just 28% of all purchases in August, a slight decrease from 29% in July and 31% in August 2012. Still, that’s a substantial decrease over the 30-year average of 40%.

Well-heeled investors continue to be benefiting the most. All-cash sales accounted for 32% of existing-home transactions in August, up from 31% in July and 27% in August 2012. Three out of four investors paid cash for their homes in August.

Since banks have no problem raising interest rates ahead of any action by the Federal Reserve, it’s fair to say that higher mortgage rates are going to be keeping many first-time home buyers out of the housing market and on the sidelines.

That said, even if existing-home sales slip over the next few months, there are a number of different places investors can look. Investors continue to be the primary purchasers of existing homes; because they have money to begin with, chances are they’ll also be willing to put some equity into updating their homes. The same goes for the roughly 40% of homeowners who either up sized or downsized during August.

Home appliance giants like Whirlpool Corp. WHR and Electrolux AB (OTCBB/ELUXY), and painting company The Sherwin-Williams Company (NYSE/SHW) should continue to benefit from an improving U.S. housing market. They should also do well even if existing-home sales dip over the next few months.

If you’re bearish on the U.S. housing market and think things will turn sour, you might want to consider an exchange-traded fund that shorts real estate-related companies, like Pro-shares Short Real Estate REK.

Even though temporary factors may be responsible for lifting existing-home sales to a six-year high, investors, whether they’re bearish or bullish, can still find ways to enhance their retirement portfolio using going forward.

This article Profiting on Existing U.S. Home Sales Whether They Soar or Sour was originally published at Daily Gains Letter