However, despite all these positive signs, there is growing concern, sparked by rising mortgage rates in recent weeks, that the housing-market recovery could be derailed.
Rising mortgage rates
Freddie Mac’s weekly survey showed that 30- and 15-year fixed-rate mortgages averaged 3.93% and 3.10% respectively last week. Both rates fell slightly last week after rising for six consecutive weeks.
However, this survey did not take into account the aftereffects of Ben Bernanke’s comments following the release of the Fed’s latest monetary policy statement last week. Bernanke said that the central bank will start easing its bond buying program towards the end of this year if the economy continues to improve.These comments have likely pushed mortgage rates higher. The data for the most recent week will be released on Thursday and is likely to show a spike.
Mortgage rates in the U.S fell to record low levels last year thanks to the Federal Reserve’s QE3 program. However, they have risen sharply since the last month, as the market very correctly forecast what Bernanke just said about easing the bond-buying program.
Will rising mortgage rates derail the recovery?
Probably not, but it will certainly slow down the pace of the housing market recovery. All the positive news I just discussed come from a period when the rates were lower than they are now. With rising mortgage rates, we will probably see the negatives in the housing market data from June and July. One we have already seen – the Mortgage Bankers Association reported that mortgage applications fell 3% in the week ended June 21.
The sharp rise in mortgage rates has created some panic. However, as I said, higher rates are not likely to derail the housing market recovery; they’re just one of the factors that have contributed to housing’s rebound, alongside tight supply. Also, despite the recent spike, mortgage rates are still low by historical standards. Even if mortgage rates were to rise by a percentage point, they would remain below levels seen in 2004 and 2005, considered the peak period in the housing market.
So should you buy homebuilders?
Higher rates may slow housing’s recovery, but they certainly won’t stall it. Therefore, I am still bullish on homebuilders in the long term.
Homebuilders saw a huge rally in 2012 as the housing market recovery began. In 2012, Lennar Corporation (NYSE:LEN) gained more than 134%, PulteGroup, Inc. (NYSE:PHM) more than 69%, and D.R. Horton, Inc. (NYSE:DHI) more than 68%. Those significant increases led to concerns that homebuilders might be overvalued. However, homebuilders are still trading significantly below the levels they touched during housing’s 2005 peak.
Moreover, concerns over rising mortgage rates and their impact on the housing market recovery have led to a sharp decline in homebuilders in the last one month, with Lennar Corporation (NYSE:LEN) and PulteGroup, Inc. (NYSE:PHM) both falling more than 16%, and D.R. Horton, Inc. (NYSE:DHI) down 20%. The recent pullback, therefore, has presented an excellent buying opportunity for long-term investors, given that the housing market is likely to continue rising — albeit at a slower pace.
Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Should You Buy Homebuilders? originally appeared on Fool.com.
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