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Invested in real estate? Be careful.

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Invested in real estate?  Be careful.

Recent home sales data and expected rising interest rates raise caution signs for 2014.

Residential real estate has had a pretty good run during 2013.  The latest S&P/Case-Shiller U.S. National Home Price Index shows that 12-month returns have totaled 11.18%, a healthy figure.

But are dark clouds on the horizon?

"Are dark clouds on the horizon?"

According to a November report from the National Association of Realtors (NAR), sales of pre-existing homes fell 4.3% in November (annualized 4.9 million sales).  This is the third consecutive monthly decline, and has sparked fears that the housing market is cooling off.

It is true that analysts still predict that 2013 will be the best year in over half-a-decade for housing sales, and that home builders remain somewhat optimistic (although less so than in September, where optimism peaked for 2013). 

However, the three-month decline in sales may reflect more fundamental issues that may spark concern among residential real estate investors:

  • Research has indicated that rising prices combined with stagnant incomes have put homes out of the reach of first-time buyers;
  • The Fed’s decision to commence “tapering” in January suggests that a period of rising interest rates will commence in early 2014 – albeit gradual;
  • Perhaps most ominously, mortgage applications last week dropped to a multi-year low, suggesting that the energy driving the recent growth in housing prices may be dissipating.

Still, housing starts seem to be steady (while down in November by 3.1%, they are up 7.9% from last November), and the economy appears to at long last be gaining steam.  The mixed messages arising from the data suggests that real estate investors should look upon 2014 with caution – whether the view should be cautious optimism or caution borne of pessimism remains to be seen.

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