Realist Real Estate Roundup - Key information for real estate investors (Part 4 of 6)
Mortgage rates are a critical input to the housing market
Mortgage rates are the lifeblood of the housing market, and the Fed’s plan to help housing began with pushing rates lower in order to allow people to refinance. They also hoped that lowering mortgage rates would support home prices.
The government’s focus is now to draw first-time homebuyers into the market. The first-time homebuyer has been largely absent from the rebound, and that has been why the housing sector continues to have a lackluster recovery.
Mortgage rates increase as 10-year bonds rally
Over the past several months, mortgage rates and the 10-year bond yield stopped correlating. Last week was no exception. The average 30-year fixed-rate mortgage increased 3 basis points to close at 3.98%. The 10-year bond rallied and yields decreased by 9 basis points.
We are in the seasonally slow period for the mortgage business, so small divergences like last week can happen. However, mortgage rates have only followed bond yields down slowly this year.
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. Builders are beginning to focus more on the first-time homebuyer as the next big trend in housing.
An alternate way to invest in the sector is through the Standard & Poor’s depositary receipt (or SPDR) S&P Homebuilders ETF (XHB). Since the economy’s household formation numbers are depressed due to the economy and not fertility rates 30 years ago, there’s real pent-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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