uploads///Mortgage Rates

Mortgage rates fall—but homebuilder margins have peaked

By

Jan. 20 2015, Updated 12:21 p.m. ET

Mortgage rates are a critical input to the housing market

Mortgage rates are the lifeblood of the housing market, and the Fed’s plan to help housing began with pushing rates lower in order to allow people to refinance. It also hoped that lowering mortgage rates would support home prices.

The government’s focus is now to draw first-time homebuyers into the market. Last week, the Obama administration made some changes to mortgage insurance premiums in an effort to help the first-time homebuyer. This caused TBAs to react. Read on to find out how.

Article continues below advertisement

Mortgage rates decrease as ten-year bonds rally

Mortgage rates have lagged the ten-year bond lately, as mortgage bankers have been reluctant to believe these lower rates are permanent. That said, mortgage bankers appear to believe that low rates are here to stay and are starting to push the refinance business again, which had been given up for dead. The ten-year bond fell 10 basis points and mortgage rates fell 9 basis points to 3.8%. Note that the MBA Mortgage Bankers Index jumped 50% last week.

Effect on homebuilders

Last week, we heard from homebuilders Lennar (LEN) and KB Home (KBH). The biggest takeaways from earnings were that:

  1. price increases are pretty much over
  2. margins are going to compress

Both Lennar and KB Home got hit hard after earnings, and the S&P SPDR Homebuilder ETF (XHB) was down almost 4% for the week.

One interesting shift seems to be happening in the homebuilding sector, however. Builders are beginning to shift their focus to the first-time homebuilder and starter homes. Luckily for the builders, they can sell a lot of starter homes. However, the margins on them are lower. Builders with large exposure to the first-time homebuyer include D.R. Horton (DHI) and PulteGroup (PHM).

Advertisement

More From Market Realist