Skip to main content

Homebuilders jump on rate cut - move is overdone

Today Reuters reported the following:

"Home builder sentiment fell for a seventh straight month in September as tougher mortgage requirements hindered sales from bloated inventories, the National Association of Home Builders said on Tuesday.

The NAHB/Wells Fargo Housing Market index declined 2 points to 20, matching the record low of January 1991 when the economy was in the throes of a recession, the NAHB said in a statement. But an interest rate cut by the Federal Reserve on Tuesday offered the industry hope, the NAHB's chief executive said."

After the Fed cut both the Fed Funds rate and the discount rate by 50 basis points today, the SPDR HOMEBUILDERS ETF (XHB) took off and registered a 5% gain on the day. The 24/7 Wall Street blog reports that the Jim Cramer "Mortgage Madness" portfolio was the best performing group today. Beazer Homes (BZH) was up 18% on the day!

Was that performance warranted or was it "irrational exuberance?" The home builders are down in the dumps but investors are walking on clouds.

Problems in residential construction are well known and are related to the following:

1. Excess inventories of unsold new homes are forcing builders to cut prices and offer incentives to boost sales. This is reducing margins for builders. Unsold inventories are causing builders to carry land and buildings on their books, tying up capital that could be applied elsewhere, to pay down their debt, for example.

2. The reluctance of investors to buy mortgage-backed securities has reduced the flow of funding used to finance many home loans.

3. Stiffening of lending standards and requirements has reduced the pool of eligible home buyers. It has also reduced the size of homes for which buyers can be approved. The McMansion is increasingly out of reach.

4. Over coming months, inventories of unsold homes could potentially increase even further as the number of foreclosures increases for the least credit-worthy borrowers.

Will the rate cut really help?

The rate cuts could increase market confidence which might help investors return to mortgage-backed securities which, in turn, increases the flow of funds to lenders who could make more loans at better rates. The change in Fed Funds rate also directly allows mortgage rates to come down.

So we have two positives that will help the mortgage rate picture. This will help reduce the inventory of unsold homes as loans become more attractive to buyers.

Lower rates will help some but not all of the borrowers whose loans will reset over the coming months. The Fed's cut will only have a marginal effect on those borrowers who are in way over their heads. Thus, in this case, the Fed cut is a neutral factor at best.

Separately, Congress passed legislation today that would allow the FHA to back refinanced loans for borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels. On the surface, this is also a positive but in looking closer, it will only help those borrowers with good enough credit to refinance. And FHA backing only protects the lenders. With a limited budget, the bill will not come close to bailing out all of the estimated 2 million to 2.5 million borrowers with adjustable-rate mortgages who are in danger of default. So this factor also appears to be neutral or insignificant.

In conclusion, the cuts today are a net positive for the housing market but it will still take many months to work off an inventory bulge of this size. We are at the end of the selling season so for many builders, they may have to wait until next spring before they see a real bounce in sales. Builders will continue to carry this inventory going forward, so they will be cautious about building more homes while the current inventory glut remains. Holders of mortgage-backed securities will still need to be wary of the low quality loans that will end up in foreclosure which could again erode market confidence. These foreclosures are a wild card: they will cause the inventory of unsold existing homes to swell which could, in turn, slow the reduction in the inventory of unsold new homes. As mentioned above, there are a good 2 million homes in danger of foreclosure due to resets and some percentage of them will end up standing empty. From my point of view, today's behavior was certainly exuberant and somewhat irrational as investors have gotten a bit ahead of themselves.

Disclosure: author owns no stocks mentioned in this article


Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:

Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:

Results here were actually quite good and, to make things even better, the previous month was revised upward.