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Weekly Realist real estate roundup, August 12–16

Part 4
Weekly Realist real estate roundup, August 12–16 (Part 4 of 7)

Mortgage rates and bonds fall, but homebuilder opportunity ahead

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.

Mortgage RatesEnlarge Graph

Bonds were extremely heavy last week, particularly towards the end of the week

After a dull prior week, bonds were right back in the soup last week. Last week was extremely data-heavy, and bonds really fell out of bed on Thursday and Friday as the 2.74% resistance level on the ten-year failed to hold. The ten-year bond yield increased to 2.83% and the Bankrate 30-year mortgage increased to 4.52%

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.

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