NEW YORK (MainStreet) From prime to subprime markets, real estate is one of the most volatile securities of them all.
But whether using 30-year ARMs (Adjustable Mortgage Rates) or a fixed mortgage rate, Americans throughout the country are moving into homes and condos. New home sales in January leapt to the highest sales rate in almost six years, and national home prices are expected to increase between 4.5% and 5% this year. We have come a long way since the 2008 housing bubble and believe that the rally will continue.
We're still recovering from a tarnished system. It used to be that if a family wanted to buy a house, they would go to a realtor, who would in turn go to the lender in which he would give a mortgage. But during the 2008 crisis, large banks bought all of the mortgages from the lenders and decided to make a fund out of all of these mortgages called mortgage-backed securities. So now, in a sense all of the mortgages were owned by the share holders of these funds instead of the original lender. The return from buying the mortgage back securities during the time period of 2002-2007 were huge, between 12 and 24%.
Investors veered toward these mortgage-backed securities because of how banks were paying very low interest rates, close to 1%. Buying these securities were a lot better option then leaving your money in the bank. Investors were also making a lot of money off of credit default swaps, which were basically insurance on your investment.
2006 was the peak of the housing market in America. During this time, there was an over supply of construction, mortgage rates started to rise again and homeowners started to sell off their property.
In 2007, 1 million tenants defaulted on their property and by August of 2008, 10% of all mortgages in the United States of America had been delinquent. The problem was, people in the subprime market were getting loans to purchase houses they couldn't afford, which is called predatory lending. This was happening to keep the mortgage-backed securities afloat. Those instigating this practice thought that if the residents of a house with a subprime mortgage foreclosed, they would sell the house for more. Yet because of the market conditions, the house was underwater before the inhabitants knew what was going on.
Since 2008, the market has come back tremendously, but yet not to the 2006 level. Last year was a great year for the housing industry. In 2013, housing prices increased 12% for the year and is still believed to be undervalued by 6%. Mortgage rates hit 4.6% in August. In the third quarter of 2013, foreclosures were down 39%.
The big question is, will the housing market continue to rise going into 2014. As the economy continues to grow, we believe that housing prices will continue to rise as well as mortgage rates. This is the reason why it is a great time to purchase real estate stocks.
Real Estate is a great investment for the younger generation and new investor to hold for the long run. This year is a big year for the housing market, following last year's upward trend. There are great stocks on the exchange that oppose profits and expansion in the future. Some of these include The St. Joe Company (JOE), Simon Property Group Inc. (SPG), Brookfield Property Partners (BPY) and Cole Real Estate Investments, Inc. (COLE). I am also strong in the building sector with companies such as the Toll Brothers Inc. (TOL).
Prognosticating the future from the past is important when analyzing an investment. You need to take everything you know and make an ultimate decision when pulling the trigger on a security. The economy has had some unfortunate turbulence the past couple of years, yet we are finally on the right road to a recovery and soon-to-be thriving market.
--Written by Max Levin for MainStreet