Link Between Real Estate Market, Stock Prices, Home Repairs That Really Dent Your Wallet

Link Between Real Estate Market, Stock Prices Question: Question: Allison, is there a correlation between the real estate slowdown and declining stock prices?

Answer: In an interesting article in Business Week, Peter Coy says that observers are trying to figure that out and reaching many different conclusions.

Merrill Lynch prepared a chart overlaying the Standard & Poor’s 500 stock index with an index of homebuilding activity from the National Association of Home Builders. The chart shows that the S&P goes up one year after the home-building index goes up, and goes down one year after the home-building index goes down.

Tuesday, the National Association of Home Builders reported its monthly sentiment index fell to a 15-year low. That leaves believers in the Merrill Lynch theory certain that stocks aren’t far behind.

Another chart from InvesTech Research correlates changes in private residential construction with recessions. Going back to 1968, it shows that with just one exception — in 1995 — every time there has been a downturn in residential construction, a recession has occurred at the same time or shortly after. Because residential construction has shrunk over the past year, followers of this index are worried.

But there are some optimists. Bob Carey, chief investment officer for First Trust Advisors, says to get ready for a bull market, noting that the stock market is 20 percent to 25 percent undervalued at current levels and should reach full valuation by sometime next year.

Carey says the demand for housing is driven by incomes and jobs, and since corporate profits are extremely strong, the outlook for income and job growth is good. "It's hard to imagine Corporate America doing well and somehow people not doing well on the employment side," he says.

Cool Market Keeps Mortgage Rates Affordable Question: Joyce, what is the relationship between a cooling real estate market and interest rates? Answer: The national average interest rate on a 30-year, fixed-rate mortgage was 6.4 percent for this week, down from the previous week’s 6.43 percent, according to Freddie Mac. Last year, the average rate for 30-year, fixed mortgages was 5.8 percent.

“A slowing housing market and signs that inflation is leveling off have helped to lower mortgage rates lately and keep them more affordable,” says Frank Nothaft, Freddie Mac vice president and chief economist. “For example, housing starts dropped to a three-year low in August and the Producer Price Index (PPI) fell below market expectations.”

The average rate for 15-year, fixed mortgages was 6.06 percent, compared with 6.11 percent the previous week and 5.37 percent a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.08 percent, down from the previous week’s 6.1 percent. A year ago, the five-year ARM averaged 5.31 percent.

The average rate for one-year ARMs was 5.54 percent, compared with 5.6 percent a week earlier and 4.48 percent a year ago.

“Going forward, the economy is expected to expand at a somewhat slower rate than it did in the first half of the year," Nothaft says. "This should continue to keep inflation in check, and therefore, mortgage rates low.” Home Repairs That Really Dent Your Wallet Question: Allison, we are having an inspection done on a home that we are buying in Frisco. What do we look for? I would imagine that some home repairs will be beyond my budget. Answer: Some home repairs are known for being far more costly than originally thought, says Mike Kuhn, author of The Pocket Idiot's Guide to Home Inspections.

Kuhn, who's also a veteran technical director at HouseMaster home inspection service, analyzed data from nearly 2 million home inspections and 1,000 HouseMaster inspection reports from different regions of the U.S. and Canada. As a result, he's compiled a list of common repairs that can end up costing home owners a bundle.
• Asphalt shingle roof replacement. If the original roof already has two layers on it, the cost of replacing the roof may increase by 40 percent because the existing layers most likely will need to be removed before a new roof can be installed.
• Wet basement. Moisture in the basement is all too common. For some the solution can be as simple as directing the downspout discharge away from the foundation. But for others, the only way to solve the problem may be to install an expensive interior foundation drainage system and/or excavate around the exterior of the foundation for water proofing. Potential costs can be tens of thousands of dollars.
• Central air conditioning system. Replacing the system's compressor may run $1500 or more, but if the entire systems needs an upgrade that number can go up exponentially, into many thousands of dollars.
• Insect damage. Treating for termites or other wood destroying insects can only be part of the problem. Repairing the hidden structural damage left behind can be extremely costly.