A Real Estate rebound?!

More encouraging news has flooded the real estate sector as the National Association of Realtors recently reported that home resales increased by a better-than-expected 3.6% in June. This pushed purchases to an annual rate of 4.89 million, but does this mean that housing has bottomed out and is in rebound mode?

This most recent outperformance was primarily driven by the following 3 factors: the federal government’s tax incentives to first-time homebuyers, low prices caused by the surge in foreclosures, and relatively low borrowing costs.

These driving forces are a far cry from the driving forces that are needed for a rebound -- namely, a surge in demand and the ability for consumers to obtain mortgage loans.

Home inventories are at all-time highs, consumers are saving and deleveraging wealth, consumer debt numbers are skyrocketing, unemployment rates continue to rise, and those that do have jobs are witnessing negative wages. Until these issues are addressed, it's very difficult to say that a bottom in the real estate markets has been hit.

Regardless, the sector has seen a nice uptrend, as seen in the performance of the following equities:

1. iShares Dow Jones US Real Estate Index (IYR), which saw a March low of $22.21 to bounce back nicely and close at $33.15 on July 22, an increase of 49%.

2. SPDR S&P Homebuilders (XHB) rebounding nicely to close at $12.89 on July 22 from a March low of $8.25, a jump of 56%.

3. Equity Residential (EQR), up 24% after witnessing a March low of $16.71 to close at $20.71 on July 22.

4. HCP Inc. (HCP) which saw a March low of $16.08, has gained 43% since then, to close at $22.92 on July 22.

If one does consider playing the real estate sector, keep in mind the risk involved with doing so. To mitigate these risks, an exit strategy utilizing stop losses is key. According to the latest data from www.SmartStops.net, the upward trend in the previously mentioned equities might be coming to an end at the following price points: IYR at $31.48; RTH at $78.36; EQR at $19.42; HCP at $21.76. Keep in mind that these triggers change as the markets fluctuate.