After months of baffling investment strategists and economists, long-term interest rates have finally begun to rise. The 10-year bond rate has risen from under 4.00% to nearly 4.40% in a heartbeat. Prospective home buyers are finding their rates rising, putting pressure on them to lock in a low rate as soon as possible.
There is little doubt that higher rates will hurt the housing market. The homebuilding stocks haven’t been hit much yet, but it’s certainly dangerous to own them for the rest of the year, if this rate trend continues. If you believe rates will continue to move higher, the housing stocks could make for an attractive short (especially with the S&P 500 setting up for a potential triple top).
If you want further evidence to question the sustainability of the homebuilding sector’s tremendous run on Wall Street, below is a piece written this week by a very competent hedge fund manager:
“According to the National Association of Realtors, who should know, second homes accounted for 36% of U.S. home purchases last year, up from more than 16% in 2003. That 36% breaks down thusly: 25% of homes were bought for investment; 13% bought as vacation homes.
Think about that for a second. More than a third of all homes bought last year were bought for either speculative purposes or as vacation homes.
This doesn’t square at all with the mantra of the home building companies and their fans, which is that the U.S. has a perennial housing shortage caused by job creation, immigration and the deep-seated hunger for home ownership.It has nothing to do, they assure investors, with the recent 4% 10 year treasury yield.
It has nothing to do with adjustable rate mortgages or “IO” loans–interest only loans–in which the only thing the homeowner pays is the interest, leaving the principle for later (which to the buyer means “when I flip the thing for a big profit”).
And it has absolutely nothing to do with speculative buying, according to home builders including–and I’ve heard them all say it–Toll Brothers, Pulte, Lennar, KB and Hovnanian.
But now we know the facts: home purchases were inflated a full 20% (the jump from 16% in 2003 to 36% in 2004) by boomers snapping up spec housing and vacation homes around the country. That’s a bubble.
And not for nothing, it seems the average single-family home financed by Fannie Mae or Freddie Mac shot up almost 12% last year, the highest rate since 1979. For those who remember that far back, 1979 ushered in a couple of pretty ugly years in the housing market.”