Danger Sign: Mortgage Rates Rising
MoneyNews
Friday, March 18, 2005
Headlines (Scroll down for complete stories):
1. Danger Sign: Mortgage Rates Rising
2. Tips for Real Estate Investing
3. REITs Still Offer Safe Haven, Decent Returns
4. Experts Wary Of Chinese GDP Estimates
5. Forbes: Rate Hike Won't Curb Inflation
Sir John Templeton Reveals Investment Secrets
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1. Danger Sign: Mortgage Rates Rising
The latest data out Friday shows that rates on 30-year mortgages climbed this week to their highest level in seven months, a trend that analysts say will slow the booming housing market.
Mortgage giant Freddie Mac, in its weekly survey of mortgage rates around the country, reported Thursday that rates on 30-year, fixed-rate mortgages averaged 5.95 percent for the week ending March 17.
This was up from 5.85 percent last week and was the highest since the week ending Aug. 5, when rates averaged 5.99 percent.
Next week the Federal Reserve could raise interest rates again -- another ominous sign for the housing market.
2. Tips for Real Estate Investing
It is obvious that many people are making big money by investing in real estate.
We have seen the median existing home price up 10.5% this year, with homes appreciating about 8% over each of the last three years. Some boom areas have had housing prices increase 100% or more in the past three years.
But can such solid growth continue?
While real estate will probably continue to be a wise investment, you should probably exercise caution before you make a move. Here are some quick facts you need to know:
- For the past three years, home appreciation has been way ahead of inflation rates, wage increases and general national economic growth.
- Analysts say recent housing growth is unsustainable, and prices could retreat slightly.
- As interest rates rise, fewer people will be able to afford houses.
- Adjustable-rate mortgages (ARMs) are becoming common – estimates say a third of all mortgages are ARMs. These are the housing industry's version of weapons of mass destruction. When the true rates kick in and increases from the Fed are added to the mix, there will likely be a wave of home sales and foreclosures.
- Second homes comprised 36% of home sales last year.
- Those buying houses primarily for investment purposes made up 64% of buyers in 2004 – and this proliferation of speculative buyers could be fueling a bubble.
Now for some tips:
- You should know that the most lucrative real estate investments came and went three to five years ago.
- Experts say you should balance your real estate holdings with other assets.
- While the housing market is anticipating a bubble, there is still value investing in quality commercial (office, shopping centers, etc.) real estate.
- There is no substitute for location – if necessary, buy the worst house in the best area.
- Maintain emergency funds to carry the property in case of market instability.
- Do your homework to be sure rental income will exceed ALL expenses – and don't depend on rapid appreciation.
Editor's Note: Sir John Templeton warns of a Housing Crisis - Find out more.
3. REITs Still Offer Safe Haven, Decent Returns
With a continued rise in interest rates and a persistent stock market, the unreal 30%-plus returns that have recently come from real-estate investment trusts (REITs) are starting to wane. But despite a rather bearish outlook on the sector, REITs could still provide some profitable buys that perform well.
After the burst of the Dot-Com bubble, the success of REITs served to heal many investors' wounds.
While REITs couldn't provide the same ridiculous returns that the tech market did in the late '90s, the publicly traded real-estate holding companies saw a 15% annual return for five consecutive years. The trusts performed their best during the past two years – total returns for the Morgan Stanley REIT Index increased 36% in 2003 and 32% in 2004.
However, that kind of growth is in the past. Experts say it was driven primarily by fund flow, as many tech stock victims sought income and appreciation in real estate.
But the sector performs relative to interest rates – and the Morgan Stanley REIT Index is already down more than 5% for the year. When rates jump, bond prices drop – as do returns on REITs.
According to Business Week, analyst Jay Leupp at RBC Capital Markets predicts total returns down as much as 10% in 2005, while Lehman Brothers' David Harris is even more bearish, predicting an 18% decline.
"As yields increase in the stock market or in the bond market, the attractiveness of REIT dividend payouts decrease as their dividend yields look less attractive," says another analyst.
Experts especially dislike residential REITs, as they are generally the most expensive and overvalued.
Financial Intelligence Report warned investors last year to avoid residential REITs and focus on REITS in commercial space.
But despite the relatively bleak residential outlook, REITs are still a sensible means of diversifying a portfolio with some income-generating real estate.
Over the past few years, REITs have served as a profitable defensive investment, paying average dividends of 4 to 6% in addition to stock-price appreciation. Most of their earnings come in the form of dividends from cash flow derived from long-term leases – and that makes them less risky than other businesses, says Don Wood, CEO of Federal Realty.
Despite some negative predictions, many experts believe REITs are still a solid investment.
"The fundamentals – earnings growth and dividend growth – are still positive," says Leupp. "High-quality, well-maintained, well-positioned real estate assets will provide investors with superb returns over the long term."
Other analysts note that these fundamentals – inherent in many REITs – suggest some real estate ventures will give stiff competition to other sectors – particularly shopping malls. Companies that buy and manage malls and offices are recommended, as they have an established tenant base and little room for competition.
Editor's Note: Which type of REIT is right for you? NewsMax's Financial Intelligence Report Tells You.
4. Experts Wary Of Chinese GDP Estimates
Can you believe the financial data about China's booming economy?
Hardly, say some experts.
Improving economic data – GDP growth, for instance -- has become such an obsession in China, many believe the numbers are being fudged.
Many regions have aspired to economic progress with almost religious fervor, and local officials have garnered recognition and promotions for reporting top GDP growth rates.
The result? According to The Los Angeles Times, for decades, many provinces, counties and cities have submitted fraudulent and inflated statistics. This is in stark contrast to the United States, where little or no attention is paid to local economic growth numbers.
In 2004, China posted a growth rate of 9.5% (two to three times that of most developed nations), while just about all of the country's major regions reported even higher GDP increases.
These local reports, China's top government statistician said, indicated that the country's 2004 GDP growth should have been as high as 15.5%.
Regional misinformation was overlooked in the past, but now it is a problem for the central government as foreign investors and analysts, among others, are questioning the credibility of China's statistics.
Recently, Chinese Premier Wen Jiabao openly blasted the "blind competition" between local governments to trump each other's GDP growth rates. Beijing has vowed to halt fabricated economic data and is urging local governments to reconsider their methods of promoting officials. But it will be difficult – since it is so hard to know who is actually telling the truth.
One Chinese expert says: "Some bureau chiefs had to make an artificially high GDP under pressure."
This might explain why one particular Chinese province boasted a 2004 economic expansion of 16.5% on the heels of a relatively modest GDP increase of 6.4% in 2003. Residents of the region seriously doubt these figures. And international analysts agree.
But many are not surprised that regional leaders throughout China are so focused on development, since Communist Party leaders themselves have staked their legitimacy on economic improvement.
In the early days of Communist China, Mao Tse-Tung's "Great Leap Forward" campaign of 1958 sought to boost economic and technical development. Then, too, production data and other measures of progress were exaggerated.
Experts believe today's regional leaders, who usually hold office for no more than four years, will do just about anything to foster development, knowing they will not be around to face the inevitable consequences.
Editor's Note: How China Could Affect Your Commodities Holdings.
5. Forbes: Rate Hike Won't Curb Inflation
The Fed intends to keep raising interest rates in order to curb inflation – and that's just a bad idea, according to publisher and former presidential candidate Steve Forbes.
He says history proves he's right and he sites the early 1980s, when borrowers were paying interest rates above 20% -- yet inflation was still rampant.
Forbes asserts that gold is the best barometer of monetary turmoil. He points out that when the price of gold drops below $300, tightened credit and economic contraction follow. If it goes higher than $400, we get inflation and higher interest rates.
He says that excessive stiffening during the late 1990s by Fed Chairman Alan Greenspan led to a commodity collapse and an easily avoidable recession.
Forbes claims there is a simple solution to avoiding inflation without an interest rate hike: The U.S. central bank must sell off its bonds (thus removing cash from the economy) until gold sinks below $400. He claims that if gold settles around $350 to $380, long-term interest rates will slow down and short-term rates will dwindle.
Editor's Note: Why Is Buffett Buying Gold - Find Out Here.
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