Bill McBride of Calculated Risk (via Abnormal Returns) makes the case that rising mortgage rates aren't going to derail the recovering U.S. housing market – a somewhat contrarian view that could give a boost to struggling homebuilding stocks.
As we pointed out earlier in this space, the homebuilders have tumbled into bear-market territory since mid-May, erasing gains for 2013. Among some standouts, Lennar Corp. has fallen 23.9 per cent, PulteGroup Inc. has fallen 24.4 per cent and D.R. Horton Inc. has fallen 27.4 per cent.
U.S. mortgage rates have been on the rise, especially since the Federal Reserve announced in June that it could start to unwind its bond-buying stimulus program, or quantitative easing, later this year – raising the possibility of earlier-than-expected interest-rate increases.
But for all the concern about the impact of rising rates on the housing market, some observers – including Fannie Mae chief economist Douglas Duncan – believe the correlation between rates and home prices isn't strong.
Mr. McBride agrees, arguing that other factors, including a stronger economy, have a bigger impact on prices. In a blog post, he looked at previous periods when mortgage rates rose sharply – including 1983-84, 1987, 1993-94 and 1999-2000 – and found that nominal house prices rose between 1.2 per cent and 10.9 per cent.
"My view is rising rates might slow price increases but not lead to a decline in prices (other than some seasonal declines)," he said. "As far as the housing recovery (residential investment such as housing starts and new home sales), I think rising mortgage rates will have a minimal impact."
Admittedly, the declines in U.S. homebuilding stocks follow a tremendous 21-month rally, when the S&P 500 homebuilding index rose more than 300 per cent between September 2011 and May 2013.
But you have to put that rally into perspective: The price-to-earnings ratios are below 13, share prices are more than 60 per cent below their 2005 highs and the homebuilding index is no higher today than it was a decade ago.
If the economy continues to improve and past eras of rising mortgage rates serve as a useful template, then the setbacks over the past couple of months could be more of a breather than a reassessment – and a tempting opportunity.