Homebuilders have a lot more confidence about their future prospects. So, why are some of the biggest housing names down more than 30% since May?
According to the National Association of Home Builders, the homebuilding industry has a lot of confidence things will get better for them. Their latest survey shows sentiment at a level of 59, which is considered positive.
(Watch more: Home builders buoyed by buyers)
However, homebuilding stocks aren’t showing any of it. Since its six-year peak in mid-May, the Philadelphia Stock Exchange’s Housing Index has dropped more than 18%. But there were a few big players in homebuilding who have really been hit hard. PulteGroup, KB Home, and DR Horton are all down nearly a third of their value since May.
So, what’s hurting housing?
Part of it has to do with interest rates. Since lows of 3.3% in November of last year, 30-year fixed mortgage rates have been climbing. They really started to take off in May, when the market started getting concerned that the Federal Reserve Bank would begin tapering its $85 billion bond-buying program. That policy, known as “quantitative easing”, helped keep interest rates near historic lows.
Mortgage rates are now at 4.4%. That’s still very low, even compared to the height of the real estate bubble. However, that raises monthly payments, putting some homes more out of the reach of buyers. Here’s why:
Assume a family wants to buy a home for $300,000, which is close to national average. Suppose they put a down payment of 16% of the home price (in this case, $48,000), a rate also around the national average. That means this family needs to get a mortgage of $252,000. When interest rates were 3.3%, they had to pay $1,103.65 per month if they got a 30-year mortgage. Now, they have to pay 1,261.92. That’s $158.27 more. Doesn’t sound like a lot, but it’s 14% more in monthly payments.
What’s more, if this mortgage is insured by the Federal Housing Administration, it requires the mortgage payments to be at most around 30% of the family’s gross income. So, when interest rates were at 3.3%, a family making about $44,000 each year could afford a home in our example. Now, with interest rates 1.1% higher, they need to make more than $50,000. Odds are, most families have not seen their incomes rise 14% in the last nine months.
(Read more: Mortgage rates level up for loans big and small)
Basically, that’s how interest rate increases of 1% or more can hurt the housing market. And, knowing this, investors are worried about housing stocks, even if homebuilders are not.
But, is there a buying opportunity now that homebuilders are down this much?
We ask Pat Dorsey, president of Sanibel Captiva Investment Advisers, to look at the fundamentals. And, Talking Numbers contributor Enis Taner, Global Macro Editor at RiskReversal.com, looks at the charts for the XHB, the homebuilders ETF. (Though the XHB may not be a perfect tracker of homebuilder stocks, it often serves as a proxy for the industry.)
Should you feel the homebuilder industry’s confidence in its own future or should you stay away from these stocks?
To hear Taner and Dorsey analyze housing and the XHB, watch the video above.