Blog : Is Recovery For Real?

by Ed Zwirn on August 21st, 2013

Despite marginally higher interest rates, Americans are buying existing homes at their most rapid rate in several years, showing that the real estate recovery is for real and not dependent upon the vagaries of monetary policy.

The interest rate on the 10-year Treasury, which is what lenders use to price mortgages, has risen from 1.76% on Dec. 31, 2012 to about 2.85% today. Working in tandem, the rate on a typical 30-year fixed-rate mortgage has also risen about a percentage point since the beginning of the year and has experienced volatility.

So real estate should be tanking, given that mortgage payments are becoming more expensive and unpredictable? No so fast.

According to the latest numbers released today, sales of existing homes reached a four-year high in July, jumping more than 6% on the month and 17% from a year ago. Far from being a disincentive to home purchasing rising (and fluctuating) rates have actually had the effect of pushing buyers to "lock in" deals.

And let's face it, the ability to get a 30-year fixed rate mortgage for well under 5% is still a good deal by historical standards, and people are buying these homes because they can. The ability to pay and confidence in the future had been so low at one point that the bargains prevalent in mortgage interest rates hardly registered on the consumer radar.

The return of this confidence is a byproduct of solid (if slow) economic progress and ought to serve as a bellwether for penny stock investors. A real estate recovery, assuming that's what we're experiencing, occurring even as money becomes more expensive to borrow is an indicator maybe of a broader recovery that may also be able to gain steam regardless of what the Fed does.

The market for everything from penny stocks to blue chip shares is currently languishing, at least in part because of concern over when the Fed might back off from its $85 billion monthly bond buying program lessen the interventions that are keeping short-term interest rates at near-zero levels. The July 31 FOMC minutes released today has basically repeated what was already known: That the bond buying may start tapering off some time this year, depending upon how the economy is performing.

This economy appears to be gaining steam, and at the same time avoiding either of the two tripwires liable to hasten Fed tightening: The jobs market is still weak and inflation remains low or nonexistent. Unless these wires are tripped prematurely, investments in penny stocks should continue to receive market support.