George Leong writes: Mortgage rates are on the rise. In November, the 30-year fixed rate mortgage stood at 4.26% compared to 3.35% a year earlier in November 2012. The average rate for the 30-year fixed rate mortgage in 2007 prior to the subprime meltdown was 6.34%, according to data from Freddie Mac. (Source: “30-Year Fixed Mortgage Rates Since 1971,” Freddie Mac web site, last accessed December 13, 2013.)

Much of the decline in mortgage rates was driven by the Federal Reserve’s massive quantitative easing policies that saw the central bank buy $85.0 billion in bonds per month in an effort to drive down lending rates and drive up consumer demand in the housing market.

Yet after adding trillions to the balance sheet of the Fed, the housing market has recovered and is currently on pretty solid ground, with higher demand and prices.

But all of this bond buying will eventually stop and the impact will push mortgage rates higher. Of course, the amount by which bond buying is reduced will be dependent on the economic renewal and jobs market. I do not know how high mortgage rates will rise in one, two, or even five years, but they will move higher as long as the economy and jobs market continue to improve.

The housing market could easily absorb a small rise in mortgage rates, but with the lowest mortgage rates behind us for the time being, I suspect the housing market will inevitably slow down as far as home price increases and sales. This could take a few more years.

With the Fed expected to begin its bond tapering early in the New Year, I expect the 30-year fixed rate mortgage rate to continue to edge higher, along with bond yields.

The combination of higher bond yields and mortgage rates is not conducive to the kind of stock market and housing market rally we have seen since March 2009.

The best days for easy price gains in equities and the housing market are behind us. There will still be opportunities to make money in the stock market in 2014, but it will not be to the same degree that we are seeing this year, which means it will be more difficult to make stock market gains in 2014.

The housing market is also likely to see some flatness as we move into 2014. At least the flow of new homes coming onto the market could slow from the current torrid pace as mortgage costs rise. The rise in the price of homes will likely also slow from the previous year, but continue to be well below the crazy prices witnessed in 2006.

Chart courtesy of www.StockCharts.com

Home prices could eventually reach the 2006 levels again, but it will take some time. With the outlook for the housing market somewhat more muted in 2014, I would advise avoiding the homebuilders and continuing to add to the home supplies companies instead, such as The Home Depot, Inc. (NYSE/HD) and Lowes Companies, Inc. (NYSE/LOW). A good small-cap home supplies stock that also looks interesting is Builders FirstSource, Inc. (NASDAQ/BLDR).

This article Best Days for Gains in Housing Stocks Behind Us? was originally published at Daily Gains Letter

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