EC Expect Rate Sensitive ETFs To Extend Their Lead Due To Housing Uncertainty

I have not been able to sell my house. I have lowered the original asking price ($1,139,000) by more than 5%. I have jacked up the commission for buyer agents. None of it matters – million dollar homes throughout Orange County, California are not receiving a whole lot of offers.

Granted, real estate is local. What’s more, I may be fortunate enough to rent out the residence. (My family already has a new home to move into in November.) Yet many stock investors have already forgotten the adverse impact that weakness in real estate can have on the broader economy as well as market-based securities.

Does my anecdotal evidence about million dollar listings in Orange County, California even matter? I think that it may. For one thing, the unemployment rate in the “OC” is a full percentage point lower than the national average. A higher percentage of employed residents typically suggests a greater amount of disposable household income. Yet prospective home-buyers are not flocking to bid; sales volume is down nearly 10% in California year-to-date. Secondly, borrowing standards remain tight, particularly in places where a 4-bedroom, 3-bath home falls into the jumbo mortgage camp. The Mortgage Banking Association expects 2014 total lending to fall 13.4%. Additionally, stagnant wage growth as well as fear of excessive debt may also be conspiring to dampen interest in home purchasing.

Homebuilders have tried to stay upbeat about their rate-sensitive industry. 30-year mortgage rates have, in many cases, dropped three-quarters of a percentage point in 2014. And while conforming loans may benefit the most, even jumbos are more affordable. The problem? Borrowers cannot get access to the credit.

Perhaps ironically, rate-sensitive stock segments (e.g., utilities, REITs, high yielding dividend stocks, etc.) as well as rate-sensitive bond assets (e..g, high-yield bonds, long-term Treasuries, etc.) have performed tremendously year-to-date – with one exception. Homebuilder shares are no longer rising and falling in sync with interest rate trends.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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