NEW YORK (TheStreet) -- The housing market is almost back, but it still has traps for investors, including some new challenges.
A lot of the data out this week is certainly better. Existing home sales rose 5.1% in May to an annual rate of 5.3 million, the best since late 2009. That's comparable to levels in the early 2000s, just as the housing bubble began inflating. New-home sales for May came in at an annual rate of 546,000 -- the latest in a series of solid gains. And mortgage rates, while rising, are still lower than they were a year ago. Consulting firm IHS says new-home sales could top 640,000 by next year, which is still way down from the pre-bubble peak of 1.2 million in 2005, said IHS economist Stephanie Karol.
Even homebuilder earnings are responding, some. Lennar (LEN) said second-quarter profit rose by a third, as new-home deliveries rose 20% and average selling prices rose 8.1%. KB Home (KBH) said new-home deliveries rose by 33%, as the number of communities it's building rose 30%. Both companies beat Wall Street forecasts.
Yet, seven years after the historic bust that led to $7 trillion in lost paper wealth, the emerging housing market has its own anomalies and challenges that investors have to watch out for.
"People would like to buy, but they don't make enough money," said Alex Barron, president of the El Paso, Tex.-based Housing Research Center, a stock-research firm. "The American Dream isn't dead, but it's not what it used to be.''
Millions more families are still renting rather than buying their housing, even though renting is more expensive than buying, on average. That is until mortgage rates, now hovering around 4%, reach 6% annually for 30-year fixed-rate loans, says Brad McMillan, chief investment officer at Commonwealth Financial Network.
That's a potential trap for real estate investment trusts like Avalon Bay (AVB) that have grown strongly as construction of rental housing came back sooner than home buying. Eventually, people are going to choose paths that are more economically rational. It's not just about preferences, it's also about budget and credit constraints, said IHS economist Stephanie Karol.