Mortgage rates are the lifeblood of the housing market. This is why the Fed began quantitative easing in the first place. Lower rates allow homeowners to refinance. Refinancing increases homeowners’ disposable income. It also helps stimulate economic growth.
Lower rates allow first-time homebuyers to move out of apartments and into houses. This means higher consumption and benefits for home improvement retailers such as Home Depot and Lowe’s. Consumption accounts for ~70% of the U.S. economy.
Mortgage rates fall despite a bond market sell-off
Over the past several months, mortgage rates and the ten-year bond yield stopped correlating. Last week, this trend broke as the two variables lined up once again. We’ll have to wait to see if this trend continues.
The average 30-year fixed-rate mortgage decreased one basis point to close at 3.97%. The ten-year bond sold and yields increased seven basis points.
Many originators are now beginning to originate stated-income loans—not to be confused with liar loans of the sub-prime days. These loans will have a higher interest rate than a generic Fannie Mae 30-year loan. That could explain why mortgage rates increased. If this is the case, it could be the impact builders were waiting for. Tight credit has been a problem for builders for a long time.
FHFA Chairman Mel Watt announced measures intended to increase access to credit at the annual Mortgage Bankers Association conference in Las Vegas. One of these measures is supposedly a 3%-down Fannie Mae loan. This would be a very welcome development for the builders.
Effect on homebuilders
Homebuilders, such as Lennar Corporation (LEN), Toll Brothers (TOL), PulteGroup (PHM), and D.R. Horton (DHI), reported decent earnings. But it appears that traffic is increasing in the previously dormant East Coast and Midwestern markets. The West Coast probably moved too quickly.
An alternate way to invest in the sector is through the SPDR S&P Homebuilders ETF (XHB). If the economy’s household formation numbers are depressed, there’s real built-up demand for housing.