Mortgage rates finally react to falling bond yields

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.

Mortgage rates finally react to falling bond yields

Mortgage rates increase as ten-year bonds rally

Over the past several months, mortgage rates and the ten-year bond yield stopped correlating. Last week, mortgage rates finally acknowledged the rally in the bond market. The average 30-year fixed-rate mortgage decreased 9 basis points to close at 3.89%. The ten-year bond rallied and yields decreased by 17 basis points.

We’re in the seasonally slow period for the mortgage business, so small divergences like last week can happen. However, mortgage rates have only followed bond yields down slowly this year.

Effect on homebuilders

Next week, we’ll hear from homebuilders Lennar (LEN) and KB Home (KBH). Analysts will be keenly interested in whether the builders are seeing an increase in traffic as a result of falling rates. We’re in the seasonally slow period, so it may be difficult to draw too many conclusions. But it certainly can only help 2015 sales.

An alternative way to invest in the sector is through the SPDR S&P Homebuilders ETF (XHB). There’s a tremendous amount of pent-up demand for housing, especially at the lower price points. D.R. Horton (DHI) has been adding exposure to this sector of the housing market. Optimism about the future of home construction has been one reason the Homebuilders ETF has outperformed the S&P 500 (SPY).