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More Real Estate Pain or Gain: Leveraged ETFs to Watch

This article was originally published on ETFTrends.com.

Real estate has come a long way since the Great Recession of 2008 that saw market values plummet to remarkable depths after low interest rates and subprime mortgages pushed homes to exorbitant values.

Push the fast forward button and the market is at an inflection point where low affordability as a result of higher prices combined with higher rates could signal more pain or the start of more to gain--something traders will keep on an eye on when playing leveraged real estate exchanged-traded funds like the Direxion Daily MSCI Real Est Bull 3X ETF (DRN) and Direxion Daily MSCI Real Est Bear 3X ETF (DRV) .

Real Estate's New Normal

During the decade-long bull run in U.S. stocks, low interest rates ruled as the real estate markets were in recovery following the credit crisis in 2008. The depressed values in U.S. real estate also attracted cash buyers from China, but even to the vast majority who used financing to purchase a home, low rates still made real estate attractive.

Now, existing homeowners are hesitant to pull out their equity built up over the last few years to refinance at today's higher rates, while would-be homeowners scoff at the higher prices and associated costs to borrow for a mortgage. However, some real estate analysts view this current market as the new normal.

"There is a definite shift," said Lawrence Yun, chief economist of the National Association of Realtors and fellow Forbes contributor. "I would characterize the current state as normalizing and not truly a buyer’s market. It was clearly a seller’s market in spring, but now things appear to be more balanced."

Based on data from real estate analytics company CoreLogic, the number of new and existing homes sold during the month of September fell by 18% compared to the same time a year ago. Not since September 2007, when the after-effects of the financial crisis were bubbling over, has home sales fallen by this much.

Data from the National Association of Realtors show that the Quarterly Housing Affordability Index has been dropping thanks to a rise in median home prices.

High Rates and Home Prices Slam Southern California Housing Market 1

While homeowners, current and prospective, yearn for low rates of previous years, market experts see them as manageable--something the real estate market will eventually adjust to, which could drive DRN.

"Some people are just used to the exceptionally low rates," said Yun. "It is an increase, but I would say by historical standards we remain at a very manageable level."

Sun Not Shining on Southern California Real Estate

The Southern California housing market, in particular, has taken a hit with the number of home sales, new and existing, dropping to a level not seen in over a decade. Data from the National Association of Realtors show that the Quarterly Housing Affordability Index has been dropping thanks to the national rise in median home prices.

According to the National Association of Home Builders (NAHB), the housing market represents roughly 15-18% of the gross domestic product. Needless to say, the central bank and the rest of the capital markets will take notice of what real estate does--and so will DRN and DRV traders.

Related: Housing Market can Adjust to a Gradual Interest Rate Hike

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