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Today's Skyrocketing Home Prices May Not Last

The past week on Wall Street was dominated by China and Ben Bernanke, but if an economic storm is brewing in China or the Fed is about to hike interest rates, you wouldn't know it from today's economic data. S&P/Case-Shiller home price data was released this morning: In April the 20-city composite rose 2.5% from a month earlier and 12.1% from a year ago. San Francisco posted the largest price rise at 23.9% -- an incredible figure that's unsustainable in the long term.  

Further, the Conference Board's consumer confidence reading jumped to 81.4 in June -- the highest level since January of 2008. Consumer confidence has bounced around in recent months, but the general trend has shown confident consumers despite higher taxes in 2013 and relatively weak economic growth. 

Finally, durable-goods orders rose 3.6% in May on the back of some big orders for passenger planes. All of this positive data has washed away fears that gripped the market over the past week, and near the end of trading the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up 0.8%, while the S&P 500 (SNPINDEX: ^GSPC  ) has climbed 1%. 

The housing news has been a boon for big banks like Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) , which are up 3.3% and 2.6%, respectively. Even when customers default on their mortgages, there's a growing likelihood that banks can get their money back if home prices are rising. But there's another side to this positive economic news that will impact banks in the long term.

Last week, the Fed's talk of paring back quantitative easing was based on a strengthening economy, and one of the side effects of tapering is higher interest rates. That means higher mortgage rates, which may have a negative impact on home prices and the number of home sales. The homes that were purchased in April and were included in the Case-Shiller data wouldn't have been hit by the higher mortgage rates of the past month, and there will be a lag of a few months before the effects of these higher rates become apparent.

As fellow Fool Dan Dzombak noted earlier today, a 30-year mortgage that went for 3.75% a month ago is now at 4.51%, which has a huge impact on a monthly payment. We may see mortgage applications dry up in the summer, and housing may not look so good in a few months if the higher rates continue. So don't jump to the conclusion that big banks are out of the woods yet.

Many investors are scared about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it stands out as "The Only Big Bank Built To Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

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  • Report this Comment On June 25, 2013, at 4:24 PM, mrwittyone wrote:

    Housing is just coming back to where it should be. I would agree it's over inflated if prices are another 25% above where they are today

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