Dec 18 turned out to be a great day for homebuilders. Shares
of top homebuilding companies rose on Wednesday after the Federal
Reserve promised to keep interest rates low for some time despite
its plans to start tapering its stimulus plan from January. The
Fed will cut down its current $85 billion a month bond buying
program by $10 billion to $75 billion.
The Fed was until now buying $85 billion in government bonds
and mortgage backed securities every month, known as quantitative
easing, to keep interest rates low and boost economic growth. In
July, Fed chief delayed tapering of the bond purchases to keep
interest rates low for some more time.
Since then, some investors have been expecting a reduction in
the economic stimulus program before year end. Fed Chairman Ben
Bernanke and company stated that the slowly improving economy and
the lowered unemployment levels were responsible for the decision
to start scaling down the bond buyback program. The U.S.
unemployment rate fell to a five-year low at 7% in November.
Ideally, tapering of the bond-buying plan would have led to
adoption of a tighter monetary policy, which would have increased
interest rates further. However, Fed said that the federal funds
rates (benchmark interest rates) will be kept low for even longer
than previously promised, irrespective of the reduction in the
bond buying program.
Stocks of large homebuilders like
D.R. Horton, Inc.
) as well as smaller ones like
The Ryland Group, Inc.
Meritage Homes Corporation
MDC Holdings Inc.
) rose on the Fed's decision to keep interest rates low. Prices
of these companies rose in the range of 3%-7% as homebuilding
stocks are most sensitive to the outlook of interest rates.
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.
However, since May, mortgage/interest rates are edging upward
to more normalized levels. The housing momentum seen in 2012 and
in the first half of 2013 had slowed down in the past 3-4 months,
hurt by the recent spike in mortgage rates, rising home prices,
tight credit availability and by political uncertainty in
Thanks to Bernanke's decision to keep the benchmark interest
rates low for quite some time, homebuilders were among the
biggest winners on the day yesterday.
The broader housing market also enjoyed a strong rally and the
SPDR S&P Homebuilders
) gained 3.0%. Moreover, the Dow Jones and S&P 500 index
surged to record highs. However, U.S Treasury prices went
Further, strong housing data released in the week also pushed
share prices of homebuilders.
Yesterday, data published by the U.S. Department of Housing
and Urban Development and the U.S. Census Bureau showed that
November housing starts surged to their highest in nearly six
years. Further, data published by The National Association of
Home Builders (NAHB) showed that the homebuilder sentiment index
rose for the seventh consecutive month in December, showing that
the recent interest rate hikes have not dampened the housing
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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