Mortgage rates fall as homebuilders report declining traffic

Market Realist

Realist real estate roundup, September 23–27 (Part 4 of 7)

(Continued from Part 3)

Mortgage rates are one of the prime drivers for homebuilders

Mortgage rates are the lifeblood of the housing market, which is why Bernanke and the Fed began conducting quantitative easing (or QE) in the first place. Lower rates allow homeowners to refinance, which increases their disposable income and helps stimulate economic growth. Lower rates enable first-time homebuyers to move out of an apartment and into a house, which means higher consumption (and good things for home improvement retailers like Home Depot and Lowe’s). Consumption accounts for some 70% of the US economy, and consumption has been depressed since the housing bubble burst. The Federal Reserve would prefer to keep rates as low as possible for as long as possible.

 

Mortgage rates fall as the market digests the impact of the end of QE and originators fight for volume 

Mortgage rates fell 9 basis points last week as bonds continued to rally off of the Fed’s decision to not change asset purchases. Last week, KB Home (KBH) and Lennar (LEN) reported earnings and both companies noted that traffic is starting to decline in response to higher borrowing rates, although it appears that this was concentrated in July and was primarily at the lower price points. As rates continue to move lower, we should see a pickup, although many borrowers who were on the fence opted to move quickly in early summer, which may have accelerated some sales.

Effect on homebuilders

Homebuilder stocks, such as Lennar (LEN), Toll Brothers  (TOL), Standard Pacific (SPF), PulteGroup (PHM), and KB Home (KBH), have rallied strongly over the past year, but they’ve given up ground since Q2 earnings. Most of the builders have reported already, and the only one that missed was Pulte. That said, both Pulte and Beazer noted that the rise in rates has started to depress traffic. Given that the economy could have depressed household formation numbers, there’s real pent-up demand for housing. Housing starts have been below historical averages for the past ten years. With low mortgage rates and increasing demand—and a strengthening economy—homebuilders now have the wind at their backs. The builders that have exposure to the red-hot West Coast market did very well. For homebuilders, the top-down macro picture looks good.

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