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Mortgage rates fall during a dull week for bonds
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.
A dull week for bonds
After a volatile prior week, bonds got a bit of a break last week. There was no major market-moving data, with the exception of the ISM (Institute for Supply Management) Services Report on Monday, which didn’t have much of an effect at all. As the bond market rallied slightly, the average 30-year fixed-rate mortgage rate fell by six basis points, from 4.37% to 4.31%
(Read more: Mortgage rates fall slightly)
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
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