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Impact of the Fed taper: The Treasury International Capital report

Part 4
Impact of the Fed taper: The Treasury International Capital report (Part 4 of 8)

The housing market: Will February’s record drop recover this summer?

The National Association of Home Builders (or NAHB)/Wells Fargo (WFC) Housing Market Index (or HMI) was released on Tuesday, February 18. The National Association of Home Builders reported that the U.S. homebuilder confidence suffered its largest one-month drop ever in February. The HMI dropped a record ten points to 46 from January’s reading of 56. This was the Index’s lowest reading since May 2013 and was attributed to an unusually severe winter. The consensus estimate for February was within the range of 54–58.

Part 4Enlarge GraphWhat is the National Association of Home Builders (or NAHB)/Wells Fargo (WFC) Housing Market Index (or HMI)? The NAHB/Wells Fargo (WFC) Housing Market Index is a monthly survey. It gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” These components are then used to derive a seasonally-adjusted index score—a score above 50 is indicative that a majority of builders rate market conditions as “good” whereas a score below 50 indicates that more builders have “poor” market expectations.

What did February’s Housing Market Index (or HMI) reading indicate? Housing data releases are important economic indicators; besides indicating an increase or decrease in housing activity, they also give guidance across other segments of the economy especially for construction and home furnishing companies. As buying a home is a large investment, these are some of the strongest consumer confidence indicators. Since consumption comprises over 70% of the economy, an improvement in these indicators will imply that the overall economy is improving.

Keeping other factors constant, a decrease in housing activity is indicative of economic contraction which could force the Fed to continue with its economic stimulus policies. This would mean interest rates would drop and bond prices would increase. The interest rate on a 30-year, fixed-rate, conventional home mortgage has increased about 1% since April 2013 to 4.43% in January 2014. If housing indicators continue to remain lackluster, interest rates may decline.

If the slump in the HMI is due to severely cold weather (as appears to be the case), then this would not lower interest rates but in fact may even increase them. This is due to two reasons. First, housing activity usually picks up pace over the spring and summer seasons due to ease in construction. Second, housing activity may accelerate more than usual over the coming months to make up for the winter slack. This may benefit homebuilders like Lennar (LEN), Toll Brothers (TOL), D.R. Horton (DHI), and PulteGroup (PHM).

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