Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Panic in the Bond Market, Did Bernanke Just Kill the Homebuilders?

Housing-Market / Housing Stocks Jun 30, 2013 - 03:25 AM GMT

By: Investment_U

Housing-Market

Zach Scheidt writes: Stock prices for major U.S. homebuilders are under pressure as investors worry about higher interest rates. If you’re invested in these stocks, you should worry, too.

Fed Chairman Ben Bernanke indicated recently that the Fed will soon begin to reduce its $85 billion-a-month bond purchases, and end them all together by the middle of next year. The news sent shivers through the bond market, driving prices lower and pushing interest rates higher.


Higher mortgage rates clearly spell trouble for homebuilders. Homebuilder stocks have already started to decline in response to these higher rates, but they could have much further to fall. Let’s take a look at how vulnerable this group could be.

Panic in the Bond Market
To understand how the Fed’s actions could dramatically affect the homebuilder sector, we first need to understand the magnitude of the Fed’s influence on the bond market.

The artificial demand for Treasury bonds and mortgage-backed securities created by the Fed has propped up prices – and by definition, higher bond prices equates to lower interest rates.

Not only has the Fed been buying bonds, but the $85 billion monthly commitment has influenced other money managers to step in and buy these bonds as well. It makes sense for institutional investors to buy “safe” assets when the Fed has publicly implied that it will do what is necessary to support prices for these assets.

If you’re an institutional investor, whose job is tied directly to the performance of the securities you own, and you hear that the Fed – your strongest ally up to this point – is now pulling out of the market, what are you going to do?

At the very least, you are going to reduce the amount of new capital that you invest in Treasurys or mortgage-backed securities. And many of these managers are selling positions rather than waiting to see how far bond prices will fall.

According to the latest reports from Freddie Mac and Fannie Mae, yields on mortgage bonds have now reached their highest level since August of 2011. And this has happened before the Fed has done anything! All that has happened so far is that the Fed has announced that it might reduce its level of purchases later this year. Imagine what could happen once the Fed actually implements these new initiatives.

Trouble for Homebuilders
It doesn’t take too much imagination to realize how higher interest rates affect homebuilders. The industry is just getting back to a profitable state, after suffering huge losses in the wake of the collapse of the housing bubble.

Today, homebuilders are finally getting back to their old ways:

•Buying large tracts of property.
•Investing hundreds of millions in developing new communities.
•Building “spec” houses in anticipation of new demand.

All of this just in time for a rate spike that figures to dramatically reduce demand for new homes.

And if the interest rates weren’t bad enough, two other issues present significant challenges for the homebuilder sector.

•Employment is weaker than you think. Sure, the unemployment rate has been slowly declining for the last few years. But the quality of the new jobs being created is much lower than the quality of jobs that were lost, and wages are lower. The New York Times refers to this phenomenon as “the hollowing out of the work force.” Highly paid professionals are still pulling in very attractive salaries. And there are now jobs available for food service workers and other low-paying positions. But jobs for middle class workers are very hard to find.
•Rental rates are dropping in many major real estate markets. Rents had been increasing for several years because of demand from individuals who couldn’t qualify for a home purchase, making homebuying (for those who can qualify) more sensible. But private equity companies have spent billions buying up distressed properties, renovating them and leasing them. There is now a glut of rental properties on the market in many cities, depressing rents. The equation changes for prospective buyers as rents get cheaper and mortgage rates go higher.

Ancillary Businesses Also Affected
Investors should also be aware of the trickle-down effect that higher mortgage rates will have on industries that are directly connected to the housing sector. Specifically, I’m watching stocks like Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), Williams-Sonoma (NYSE: WSM), Pier 1 Imports (NYSE: PIR), and other home renovation/decor companies.

If you’ve ever moved into a new home, you know that there are a myriad of shelves to be hung, furniture to be purchased, pictures and curtains to be hung, and more. There is a thriving industry built around consumers who are moving into new houses and “settling in.” (Not to mention the fact that Home Depot and Lowe’s have institutional contracts with most of the contractors engaged in building the homes).

The majority of these stocks connected to the homebuilding industry have rallied sharply over the last few quarters. You can find a good list of these companies by looking at the holdings of the SPDR S&P Homebuilders (XHB) ETF. Morningstar also has a helpful starting list of these stocks. Investor sentiment has been strong, but is now shifting due to the domino effect stemming from the Fed’s bond purchase decisions.

Take a careful look at your portfolio to see what stocks might be affected by a decline in the homebuilding industry. Consider buying puts or selling short in order to profit from a decline in homebuilder stocks and other stocks directly related to this industry.

Source: http://www.investmentu.com/2013/June/bernanke-killed-homebuilders.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in