It’s not a secret that home prices are on the rise in the U.S. According to the latest data, home prices jumped 12.2% in May from a year ago, the most in seven years. CoreLogic, a data provider, also says that prices rose 2.6% in May from April, the fifteenth straight month-over-month increase. But more interestingly, it isn’t just that prices have gradually began to climb – it’s the sentiment that shifted.
A survey by the University of Michigan released last month found that more Americans believe it’s a good time to buy a home because both rates and prices are just starting to rise. Contrast that to the awfully negative and depressive sentiment towards housing that used to rule only a year and a half ago. I believe that, more than anything else, the shift in sentiment is the most promising gauge for a continued rebound in home prices.
What’s driving the rally?
There are several catalysts behind the jump in home prices. First, mortgage rates have leaped from 3.4% last month to 4.45% today. That’s a frightening jump in a such a short time. But since rates are still historically very low, this jump is spurring folks to buy today to lock in lower rates before they climb higher. Another reason for the strong rebound is the buying power of the public. The amount of a household’s debt payment as a percentage of disposable personal income fell to just 10.4%, according to the Federal Reserve. That’s down from 16% just a few years ago. It means that the U.S. consumer now has the best potential borrowing power in years.
How to take advantage of this opportunity
One idea is to simply invest alongside the nation’s largest home builders. Take Lennar Corporation (NYSE:LEN), for example. The giant home builder just posted blockbuster quarterly numbers. The company reported a 27% rise in orders in the second quarter. Its number of houses ordered but not yet finished rose 55% in the quarter, and revenue increased 53% to $1.43 billion. The stock jumped as high as 4% on the news.
In the past, Lennar Corporation (NYSE:LEN) predicted that there would soon be a dwindling inventory of land. That’s why it cleverly acquired lots of it at cheap prices two years ago to last the firm until 2014. And it plans to spend another $2 billion a year on land starting in 2015.
Another more creative idea is to look at private mortgage insurers. Private mortgage insurers provide lenders with an alternative market for the federal government insurance programs by compensating for losses owing to defaults by borrowers. Borrowers or homeowners with less than 20% down payments are required by law to get themselves insured for their loans.
And that’s where Radian Group Inc (NYSE:RDN) enters the picture. The company recently posted a profit of $0.11 per share against an expectation of $0.52 loss per share, while the reported top line of $260 million beat estimates by 16%. The results were positively affected by higher mortgage insurance writing and higher net gain on investments. The company wrote $4.01 billion during the month of February versus $3.54 billion during the month of January.