Is it possible the best thing for a continued rally in homebuilder stocks may be the fact that the Fed thinks the housing market is going south?
Shares of homebuilders rose more than they had in two months on Wednesday, after the Federal Reserve declared it would continue its $85-million-a-month bond-buying program. The S&P Supercomposite Homebuilding Index gained 6%.
The Housing Recovery motif is up 7.9% over the past month, and 13.3% for the year. Over those same time periods, the S&P 500 has risen 4.4% and 19.6%, respectively.
What’s all the fuss about? Mortgage rates. They loosely tend to follow the same path as 10-year Treasury notes, which have seen their rates rise in part due to anticipation that the Fed would start to taper its program.1
As a result, mortgage rates had increased by more than a percentage point since late May, when Fed Chairman Ben Bernanke first suggested the Fed could begin slowing its bond purchases later this year.
The higher the mortgage rate, the less you can expect housing demand to revitalize the economy.
And as Wall Street Journal’s Moneybeat blog pointed out, homebuilders have been among the biggest beneficiaries of the Fed’s quantitative easing. Most of the stocks hit 52-week highs in the days before Bernanke’s announcement.
But Bernanke & Co. are apparently still of the mind that housing needs help, and there is evidence to suggest that higher home prices and rising interest rates, combined with a slowdown in investor purchases and a shortage of homes for sale are all conspiring to weigh on the recovery.2
And, yes, that’s correct – housing has been hampered by higher interest rates, which have come about partly because of expectations of a Fed taper that wasn’t executed because of higher interest rates. Got that?
No matter – many analysts expect the Fed’s decision to stand pat to be a boon for housing. Stephen East, a homebuilder analyst with International Strategy & Investment Group, told Bloomberg News, “That drop [to come in mortgage rates] will have a quick, positive impact on home sales — particularly at the entry level. If rates drop, those moping potential buyers are suddenly given a second chance at a home.”3
Of course, not many asset holders were immediately moping after the Fed’s decision, least of all homebuilder shareholders.
1Chris Dieterich and David Benoit, “Homebuilders Tack On Gains Thanks to Fed’s No Taper Call,” WSJ.com, Sept. 18, 2013.
2Nick Timiraos and Conor Daugherty, “Home-Sales Frenzy Eases,” WSJ.com, Sept. 15, 2013.
3John Gittelsohn & Prashant Gopal, “Homebuilders Rise Most Since July After Taper Refrained,” Bloomberg.com, Sept. 18, 2013, http://www.bloomberg.com/news/2013-09-18/homebuilders-rise-most-since-july-after-taper-refrained.html.