Realist Roundup: The federal shutdown's impact on REITs

Part 4
Realist Roundup: The federal shutdown's impact on REITs (Part 4 of 7)

Why mortgage rates fell even as rates rose during the shutdown

Mortgage rates jump as the market tries to get ahead of quantitative easing 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 US 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

Mortgage rates fall as originators compete for business

The average 30-year fixed-rate mortgage fell by 7 basis points even though the 10-year fell and TBAs were flat. With the refinance boom over, originators are overstaffed and cutting prices to drive business. The government shutdown will restrict borrowing further, which is bad news for the originators and explains why they’re getting aggressive with price.

Currently, the IRS isn’t submitting tax verification data to originators, which is a big safeguard against fraud. Most lenders are waiving the verification requirement, at least for W-2 borrowers (borrowers who have a full-time job and have taxes withheld from their paycheck). Self-employed people are probably out of luck until the government reopens its doors. Certain other loans (USDA in particular) are unavailable at the moment.

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.

The Realist Discussions