Mortgage Rates Increase As Bonds Sell Off
This week in real estate: Mortgage rates, bonds, and TBAs (Part 4 of 6)
Mortgage rates feed the housing market
Mortgage rates are the lifeblood of the housing market. This is why the Fed began quantitative easing in the first place. Lower rates allow homeowners to refinance. Refinancing increases a homeowner’s disposable income. It also helps stimulate economic growth.
Lower rates allow first-time homebuyers to move out of apartments and into houses. This means higher consumption and benefits for home improvement retailers such as Home Depot and Lowe’s. Consumption accounts for ~70% of the U.S. economy.
Mortgage rates increase as ten-year bonds fall
Over the past several months, mortgage rates and the ten-year bond yield stopped correlating. Last week, this trend broke as the two variables lined up once again. We’ll have to wait to see if this trend continues.
The average 30-year fixed-rate mortgage increased 24 basis points to close at 4.14%. The ten-year bond fell and yields increased by 15 basis points.
Many originators are now beginning to originate stated-income loans, which are not to be confused with liar loans of the subprime days. These loans will have a higher interest rate than a generic Fannie Mae 30-year loan. That could explain why mortgage rates have increased. If this is the case, it could be the impact that builders are waiting for. Tight credit has been a problem for builders for a long time.
At the annual Mortgage Bankers Association conference in Las Vegas, Federal Housing Finance Agency (or FHFA) chairman Mel Watt announced measures intended to increase access to credit . One of these measures is supposedly a 3%-down Fannie Mae loan. This would be a very welcome development for builders.
Effect on homebuilders
Homebuilders such as Lennar Corporation (LEN), Toll Brothers (TOL), and PulteGroup (PHM) reported decent earnings. We also heard from D.R. Horton (DHI) recently. Texas, Florida, and the Carolinas are strong, but the Midwest is still lagging.
An alternate way to invest in the sector is through the Standard & Poort depositary receipt (or SPDR) S&P Homebuilders exchange-traded fund (or ETF) (XHB). Since the economy’s household formation numbers are depressed, there’s real built-up demand for housing. Optimism about housing has been one reason the Homebuilders ETF has outperformed the S&P 500 (SPY).
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