Shares of some top homebuilding companies rose on Wednesday,
Sep 18, after the Federal Reserve unexpectedly announced that it
was not starting to taper its QE stimulus plan. The current bond
buying program is expected to remain intact for some time.
The Fed is currently buying $85 billion in government bonds
and mortgage backed securities a month, known as quantitative
easing (QE), to keep interest rates low and boost economic
growth. In June, Fed Chairman Ben Bernanke announced plans to
scale back this bond-buying plan by year end and instead adopt a
tighter monetary policy to avoid deflation. A tighter monetary
policy would have resulted in further increase in
interest/mortgage rates, which would, in turn, have affected home
In July, Bernanke delayed the tapering of the bond purchases
to keep interest rates low. Since then, investors have been
expecting a reduction in the economic stimulus program before
year end. However, Bernanke said that they wanted to see more
evidence of economic growth before reducing the bond buying,
suggesting that the rising interest rates could have played a
role in the 'no taper' decision. The housing market gained on
expectations that Wednesday's announcement may send mortgage
High interest rates dilute demand for new homes as mortgage
loans become expensive, thus lowering a buyer's purchasing power.
This can hurt volumes, revenues and profits of homebuilders.
Homebuilders have largely benefited from historically low
interest rates, eventually leading to the sharp increase in home
buying activity since mid-2012. Housing recovery drives
employment upward and builds consumer confidence, thus providing
stimulus to the overall economy.
However, since May, mortgage/interest rates are edging upward
to more normalized levels, raising concerns among some analysts.
As a result, share prices of most housing stocks started hurtling
down after having peaked in May. The better-than-expected
earnings at most homebuilders in the last quarter also failed to
prevent the share slide.
Stocks of large homebuilders like
D.R. Horton, Inc.
) as well as smaller ones like
The Ryland Group, Inc.
Meritage Homes Corp.
MDC Holdings Inc.
) rose on the Fed's decision to not taper its monthly bond-buying
program. Prices of these companies rose in the range of 5%-9% as
homebuilding stocks are most sensitive to the outlook of interest
The broader housing market also enjoyed a strong rally and the
SPDR S&P Homebuilders
) gained 3.2%. Moreover, the Dow Jones and S&P 500 index
surged to record highs. However, bond yields went down and the
U.S. dollar fell to a seven-month low.
D R HORTON INC (DHI): Free Stock Analysis
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
MDC HLDGS (MDC): Free Stock Analysis Report
MERITAGE HOMES (MTH): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
TOLL BROTHERS (TOL): Free Stock Analysis
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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