Must-know: Why mortgage rates rose on the October FOMC decision
Mortgage rates fall as the market makes new forecasts about quantitative easing
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.
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Mortgage rates rise after the FOMC statement and strong ISM report
The average 30-year fixed-rate mortgage rose by 5 basis points as the the ten-year sold off and TBAs followed. With the refinance boom over, originators are overstaffed and cutting prices to drive business. We’ve seen a number of small originators go out of business, as they found themselves unable to compete in a purchase-driven mortgage market. The purchase market is fundamentally different from the refinance market in that it’s driven by relationships and not price. We’ve seen big drops in mortgage banking activity at the big banks in Q3.
The decrease in rates has given borrowers one last chance to refinance at lower rates before they start going up. The last two weeks were supposedly good for mortgage originators
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. KB and Lennar have November fiscal years, so we’ve already seen their third quarter earnings. Next week, we’ll hear from Pulte.
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.