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Homebuilders breathe a sigh of relief as mortgage rates fall

Brent Nyitray, CFA, MBA

Realist real estate roundup, September 16–20 (Part 4 of 7)

(Continued from Part 3)

Mortgage rates jump as the market tries to get ahead of quantitative easing withdrawal

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 U.S. 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 Fed makes no changes to asset purchases

The average 30-year fixed-rate mortgage dropped by 15 basis points as the Fed decided to maintain its current pace of Treasuries and mortgage-backed securities. Early in the week, Larry Summers withdrew his name from consideration as the next Federal Reserve Chairman. He had been viewed as skeptical about the efficacy of quantitative easing and supported more stimulus on the fiscal side of the equation.

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.

Continue to Part 5

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