By Kevin Grewal, Editorial Director at www.SmartStops.net
NEW YORK (
) --As the economy starts to show signs of a self-sustaining recovery, many have suggested that the real estate markets have bottomed out. However, there are plenty of signs to indicate an uphill battle still lies ahead.
From an optimistic view, real estate is still relatively affordable, consumer spending is trending in the right direction, real disposable income is on the rise, consumer confidence is at a three-month high, new-home construction is low and home sales are improving. These are all positive factors for the real estate markets that influence supply-and-demand forces and generally push prices up.
However, it is more likely that foreclosures and the demise of government funding will put a damper on these positive factors, further hindering the real estate markets.
According to the National Realty Association, there are more than 2 million homes currently in the foreclosure process and some real estate experts suggest that an additional million or two will likely follow in the coming months. With this in mind, banks are likely to flood the market with these homes, pushing inventory levels up and producing more than ample supply.
As for the government, the
is likely to increase the federal funds rate and exit the mortgage-backed securities program in the first half of 2010, which is expected to result in a significant increase in mortgage rates. Many suggest that the Fed's purchase of mortgage-backed securities is one of the major driving forces propping up the real estate market.
Additionally, the first-time homebuyer tax credit, which was recently extended, is set to expire early next year and further take away an incentive to purchase a new home.
In a nutshell, the real estate markets are much healthier than they were a year ago and are trending in the right direction. However, both macroeconomic and microeconomic factors suggest that prices will likely decline before seeing any significant increases.
Some equities that illustrate the upward trend in real estate that could be influenced by these forces include:
SPDR S&P Homebuilders (XHB) - Get Report, which is up 87% from a March low of $8.23 to close at $15.35 on Monday.
iShares Dow Jones US Real Estate (IYR) - Get Report, which has more than doubled from its March low of $22.21 to close at $47.43 on Monday.
UltraShort Real Estate ETF (SRS) - Get Report, which enables investors to play the opposite direction of the real estate market and is down 93% from its peak in March to close at $7.04 on Monday.
When investing in these ETFs, it is important to understand the inherent risks involved and use an exit strategy to help mitigate these risks. According to www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points: XHB at $14.96; IYR at $44.82; SRS at $6.84. These price points change as market conditions fluctuate; updated data can be found at www.SmartStops.net.
-- Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.