Daily Gains Letter Advises on How to Safeguard a Portfolio from the Coming Housing Crisis

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Daily Gains Letter cautions investors about the approaching housing crisis and offers advice on how to protect a portfolio from it.

Daily Gains Letter (www.DailyGainsLetter.com), an e-letter published by Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is advising investors on how to safeguard their portfolios from the coming housing crisis.

“The U.S. housing market has enjoyed a boom that’s lasted several years as prices have ratcheted upward toward the 2008 highs, prior to the subprime mortgage meltdown,” says George Leong, chief financial analyst for Daily Gains Letter. “Now, while the housing market has been fairly steady with above-average price appreciation potential in home builder stocks, I still think there could be some issues on the horizon.”

According to Leong, some would argue that the housing market is coming off a strong April, with the housing starts reading at 1.07 billion, well above the consensus 975,000 and the 947,000 in March. Building permits, which are an indicator of demand down the road, were also strong at 1.08 billion, compared to the one-billion consensus estimate and March’s 990,000.

“While the readings look pretty good, a deeper look into the housing market suggests we could be headed for a housing crisis down the road,” Leong adds. “Mortgage rates are rising, which is affecting demand in the housing market. Higher mortgage rates also hurt those looking to renew their mortgages, especially those who are already really tight with payments.”

According to Leong, the Federal Reserve created an artificial marketplace of low mortgage rates by buying bonds and mortgages over the past few years, but that is changing, as the central bank moves towards eliminating all of its monthly bond purchases.

“The result will be higher mortgage rates in the housing market down the road, especially as interest rates begin to rise in 2015. Trust me when I say that this will hurt the housing market,” he observes.

A report by real estate firm Zillow foreshadows the potential problems to come in the housing market. According to the company, the so-called “national negative equity rate” came in at 18.8% in the first quarter, which is better than the 19.4% at the end of 2013 and the 31.4% in 2012. That said, 19.4% is still a worrisome reading, says Leong. (Source: “Affordable Homes Three Times More Likely to be Underwater than Expensive Homes,” Bloomberg web site, May 20, 2014; http://www.bloomberg.com/bb/newsarchive/aCG9bsQFtSpw.html.)

“This implies that about 9.7 million homes have outstanding mortgages greater than the value of the home. And to make matters worse, Zillow says that about 30.2% of the homes in the bottom tier based on home prices are underwater,” Leong notes. “This suggests the housing market could be in trouble as mortgage and interest rates rise.”

The numbers indicate that home builders realize this. The NAHB Housing Market Index continues to be weak, with a reading of 45 in May—well below the healthy reading of 80. According to Leong, this number, the report from Zillow, and rising interest rates are red flags that could spell trouble for the housing market.

“Investors bullish on the U.S. housing market might want to consider home supplies companies,” Leong concludes. “Those looking to protect their portfolio from a housing crisis could consider buying put options on exchange-traded funds that track the performance of the U.S. housing market.”

For more information on Daily Gains Letter, visit www.DailyGainsLetter.com.

Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.lombardipublishing.com.

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Release ID: 46128

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Name: Wendy Potter
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Organization: Lombardi Publishing Corporation
Address: 350 5th Avenue, 59th Floor, New York, NY 10118
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