NEW YORK: America's housing market is both cheap and out of reach. It's one of the few assets that still look undervalued as stock and bond prices go through the roof. That's ironic, considering the Federal Reserve's bond-buying policy was designed in part to prop up housing. But tight lending standards make it hard for many to take advantage of the opportunity.
There may not be much juice left in bonds. Last week PIMCO's Bill Gross declared the bull run over. Hedge fund icons Stanley Druckenmiller and Peter Singer blame the flood of cheap money from the Fed for distorting the market and pushing prices up. The average yield on US junk debt has fallen to just 5 percent, according to Barclays, as investors put a need for decent returns above fears about credit risk. Stocks, meanwhile, have reached record highs, which by economist Robert Shiller's measure makes the S&P 500 look overvalued by more than 40 percent.
Housing, however, has just begun its recovery. Prices, though up steeply this year, are still 30 percent below their 2006 peak. Owning a home looks extraordinarily cheap, too. The median monthly mortgage payment in March was $678 - just 13 percent of household income, according to Morgan Stanley. That's well below the 30 percent or so that's common when residential real estate is running hotter.
It sounds like grounds for a property boom. But individuals have been slow to take advantage. US homeownership is at its lowest level since 1995, according to the Census Bureau. In part that's because investors like Blackstone have been buying houses in bulk, reducing inventories of homes for sale in some areas of the country. On top of that, banks are far more reticent about giving people mortgages than before the crisis.
Housing bargains may not be around for too long, though. If the economy picks up, interest rates will rise. A borrower would pay about 20 percent more a month if she took out a $240,000 loan at 5.5 percent rather than today's 3.5 percent. That could make for another quirk of fate. By the time potential homeowners are willing and able to take the plunge, it could be too late.
CONTEXT NEWS
- On May 10, Bill Gross, manager of the largest bond fund and founder of PIMCO, tweeted that the bull market in bonds probably ended on April 29.
- Speaking at the Ira Sohn Investment Conference in New York on May 8, Paul Singer, founder of the $21 billion hedge fund Elliott Management, said the Federal Reserve is distorting bond prices. Stanley Druckenmiller, founder of Duquesne Capital Management, called the central bank's monetary policy the "most inappropriate in history" at the same gathering.
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