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5 Reasons to Stop Whining About a New Housing Bubble

We got a bunch more housing data this week, and the story remains the same:

Housing is booming.

So stop talking about the bubble that hasn’t inflated and start thinking about how you can ride this trend.

I know it’s uncomfortable to see housing snap back like this. The pain of 2007 and 2008 has many Americans conditioned to believe that a rapid run-up in housing this time is as unsustainable as it was before the mortgage meltdown.

But for many reasons, housing’s recovery seems sustainable. Here are just a few:

It’s Cheaper to Buy: How Much cheaper? It’s hard to say. For instance, Trulia Trends has calculated that it is 41% cheaper to own a home than to rent. Of course, that includes staying put for at least seven years, baking in tax breaks and paying under the terms of a 30-year mortgage with a 3.9% interest rate after a 20% down payment. Every location and living situation is different, so there’s no clear discount … but broadly the math favors buying.

Demand Not Great, But Supply Is Worse: If you’re only focused on the demand side — pointing to stricter lending standards at banks and fewer qualified consumers thanks to the financial crisis eating into savings, or anemic growth for jobs and wages — you’re missing the whole story. An utter lack of new home construction since 2008 has allowed the modest demand to bleed down inventories to the point where supply and demand are at worst in equilibrium — and in some markets, demand is much bigger than supply. Single-family starts are roughly a third of what they were at their peak eight years ago, so despite improvement in construction, we have a long way to go.

housingstarts

Prices Going Parabolic: In some markets where the demand is robust, the year-over-year price increases are downright obscene. For instance, real estate site Movoto calculated that the average price per square foot in markets including Sacramento, Phoenix and Oakland soared by more than 40% when they compared May 2012 with May 2013 data.

June 2013 Real Estate Market

Builders Feeling Good: Even after the meteoric run for many homebuilders, the companies remain optimistic that the best days are ahead. According to the National Association of Home Builders, confidence in June hit its highest level since April 2006.
That kind of bullishness says a lot in and of itself, but it’s particularly noteworthy that sentiment is so high even after stocks like Toll Brothers (TOL), DR Horton (DHI), PulteGroup (PHM) and Ryland Group (RYL) have all added 50% to 150% since March 2012. And when you consider this chart from Bill McBride at Calculated Risk that shows how NAHB data led both the crash and rebound, the dramatic upward momentum of late could portend not just sustained recovery, but even bigger gains ahead for housing.

HMIdata

Permits Portend Continued Growth: Yes, permits fell a bit overall — but that’s after a mammoth surge in April to above 1 million, and was driven mostly by a pullback in multifamily construction and not single-family permits. In fact, permits for single-family homes were up to 622,000 units — the best since May 2008 — according to the Commerce Department.

The longer-term risks include the threat of rising rates, which could add a big chunk of change to the cost of buying a house and deter some buyers, as well as continued macro risks (a China slowdown hurting global demand, for instance) that could weigh on many facets of the American economy, including housing.

And we are playing an expectations game. The Commerce Department report on permits also included housing-starts data that was up 6.8% but still fell slightly short of Wall Street forecasts. As we have learned so many times with stocks like Apple (AAPL), it is sometimes not an issue of growth but of how much growth. Builders or home prices might not crash on a more modest improvement in housing across the next few years, but they might not see the brisk gains we have of late, either.

But investors who have been waiting in the wings for the last year or two, fretting about the sustainability of housing’s recovery … well, this week is just one more round of data that shows the housing recovery is currently well underway.

In fact, before long, it might actually be spoken of in the past tense as momentum wanes and a recovery evolves into equilibrium.

Keep that in mind as you invest.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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