Continued from Part 3: Ginnie Mae TBAs rally before the Fed meeting
Mortgage rates jump as the market tries to get ahead of quantitative easing (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.
Mortgage rates fall as the ten-year bond rallies
Mortgage rates fell by 3 basis points in the context of a 5 basis point rally in Treasuries. This is typical—mortgage rates tend to move a little less than the ten-year bond. The mortgage banking business has become more competitive as the refinance market dries up. This is good for borrowers and homebuilders, but not necessarily good for originators. We have seen layoff announcements from most of the major banks as they lay off thousands in their mortgage unit.
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.
- Part 1 - Analysis of breaking news: Larry Summers withdraws name from consideration
- Part 2 - Fannie Mae TBAs rally as Fed debates end of quantitative easing
- Part 3 - Ginnie Mae TBAs rally before the Fed meeting
- Part 4 - Mortgage rates fall as originators become more competitive
- Part 5 - Week in review: A sub–300 thousand initial jobless claims report?
- Part 6 - Week in preview: Why the Fed will be in the spotlight
- Part 7 - Analysis: With Summers out, implications for mortgage REITs
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