It's Still Time to Move Out

 | Mar 26, 2014 | 5:30 PM EDT
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About a month ago, in a column titled "Time to Move Out," I recommended selling the homebuilders. And although they are all down between 5% and 10% since then, with the exception of Hovnanian Enterprises (HOV), which is down about 20%, they should be down much more, I believe.

The median sales price for new homes has been in a steady decline for about the past year, from a high of $279,500 in April 2013 to a low of $261,500 this past February. And that trend looks to be accelerating, as the spring housing market is not showing signs of improvement.

A similar trend is evident in the quantity and sales prices of existing homes. Although median sales prices are above where they were a year ago, they are below where they were six months ago. In the past year, they've gone from about $190,000 last February to $230,000 last October and have since pulled back to about $212,000.

A lot of that volatility was due to the surge of cash buyers last year. But in the last six months, that surge has all but disappeared. Last February, average monthly transactions were about 160,000. By October it had surged to 270,000. And now it's back to about 160,000 and still falling.

The cash buyers bid themselves and investors out of the market and have now withdrawn. The continuing downward trend is because the owner-occupied buyers, after getting scared off by the spike in rates last year, have not, so far, come back to the housing market.

By March, the strength of the spring housing market becomes known, as buyers and sellers usually start preparing to make a move during the winter months. The pent-up demand from last year, coupled with slightly lower mortgage rates from last year, was expected to set up this spring and summer housing market for some strength, but it's not happening.

After the Federal Reserve announced its intention to begin buying $40 billion monthly of agency mortgage-backed securities on Sept. 13, 2012, one of the primary memes that economists and bond-market participants discussed was that the forced flattening of the yield curve would be counterproductive, because bank profit margins on a per-loan basis would be negatively affected.

The argument went further to stipulate that once the slope of the yield curve was allowed to rise and the spread between short- and long-term rates increased, bank profits from originating loans would increase, and bank lending for productive purposes would again replace their preference for putting on carry trades.

This hasn't happened either.

When the Fed announced that it would purchase mortgages, the 10-year Treasury yield was 1.75%, and the 30-year fixed conventional conforming mortgage rate was 3.50%.

A few months later, on Dec. 12, 2013, as the Fed announced its intention to increase quantitative easing further by buying an additional $45 billion monthly of longer-term Treasury securities, the 10-year yield was only 3 basis points lower at 1.72%, and the 30-year fixed mortgage rate was only 15 basis points lower at 3.35%.

That point, just three months into the aggressive push into mortgages by the Fed, marked the low for mortgage rates.

By May 1, 2013, when Chairman Bernanke began to imply after the FOMC meeting that he was considering an exit to both programs, the 10-year yield had declined to only 1.66%, and the 30-year fixed mortgage rate had already climbed back to 3.54%, above where it had been prior to the September announcement of mortgage buying.

What we have right now is a monetary policy that has failed in the past year and half to move Treasury yields or mortgage rates, or to stimulate lending or borrowing.

The entire goal of using QE to buy mortgages and long-term Treasuries was to accomplish all of those things.  

Additionally, according to the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices, neither the most recent rounds of QE nor the tapering of them has had any substantive impact on bank's lending standards or interest in making loans.

Prior to the latest rounds of QE and the surge in cash buyers, the last time 30-year fixed mortgage rates were in the 4.3% range, where they are today, was in the summer of 2011.

The price of all of the builders' stocks then was 50% to 80% below current prices. I am reiterating my sell recommendation on the entire sector: DR Horton (DHI), Ryland Group (RYL), Toll Brothers (TOL), Lennar (LEN), Beazer Homes (BZH), KB Home (KBH) and PulteGroup (PHM). 



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