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Weekly Realist Real Estate Roundup – Mortgage Rates Jump (Part 4)

Brent Nyitray, CFA, MBA

Weekly Realist Real Estate Roundup (Part 4 of 7)

(Continued from Part 3)

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Mortgage rates jump as the market tries to get ahead of QE 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.

Bonds sell off ahead of the jobs report 

Last week was all about the jobs report on Friday. The 10 year bond actually traded with a 3 handle pre-open the day of the jobs report. Mortgage rates jumped 13 basis points in sympathy. The market will now start worrying about the upcoming FOMC meeting next week. The big question besides whether the Fed starts tapering or not is whether MBS will be part of the equation or not. The Fed may decide to reduce MBS only (unlikely), a mix of Treasuries and MBS (the most likely), or Treasuries only. There seems to be a building consensus that the Fed may maintain purchases of MBS for the near term, which will be good for TBAs at the margin (and borrowers, because it will lower mortgage rates).

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: The week in review

Continue to Part 5

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