• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

The Less the Fed Knows, the Better for Housing

Trimming the Fed's balance sheet raises questions about what FOMC members know about the economy.
By ROGER ARNOLD Apr 19, 2017 | 03:00 PM EDT
Stocks quotes in this article: HOV

It's only been two weeks since I addressed housing and homebuilding, but given the season and events that have transpired during the interim, it's appropriate to consider the issue again. 

In the past two weeks, the 10-year U.S. Treasury yield has declined by about 18 basis points, from about 2.38% to 2.20%. It was as low as 2.17% a few days ago. The 30-year fixed conventional conforming mortgage rate has declined by a similar amount, which has marginally increased home purchase affordability and allowed homebuilders' stocks to increase further. 

The two builders I've been focusing on for the past year are Hovnanian Enterprises (HOV) and Beazer Homes BZH because of their concentration on entry-level homes and the fact that first-time homebuyers are the most sensitive to mortgage rates. 

During the past two weeks, Hovnanian and Beazer have risen about 5.5% and 6.5%, respectively. 

I expect all of these trends will continue and accelerate in the immediate and throughout the spring and summer housing seasons. 

Although there are more reasons why I believe this to be the probable trajectory than I can discuss here, the principal reasons are an extension of what I discussed two weeks ago and have written about on many occasions over the past several years. 

First, there are the FOMC's fixation on "normalizing" interest rates, monetary policy broadly and now the size and composition of the Fed's balance sheet, to the exclusion of considering the state of the economy. 

Fed Vice Chair Stanley Fischer gave a speech two days ago in which he discussed what he believed the bond market's reaction would be to the Fed beginning the process of shrinking its balance sheet. The Fed would do this by selling holdings of mortgage-backed securities and long-dated Treasuries acquired during the quantitative easing policy initiatives. 

The gist of his comments was that the bond market should not respond poorly and repeat the "taper tantrum" that followed then-Fed Chair Ben Bernanke's interest in beginning the process of reducing the purchases of Treasuries and mortgages in 2013. 

That assessment is fine. The issue is with its timing. 

The old saying, "If it ain't broke, don't fix it," applies here. 

Nobody, other than the FOMC members themselves, is concerned at this point about the size of the Fed's balance sheet. 

Bringing it up now as an issue is counterproductive because it raises concerns by bond market participants about the awareness FOMC members have about the real state of the economy, and thus their ability to prioritize what appropriate policy and communication concerning such should be. 

As concerns the real state of the economy, the best aggregate depiction of it is the Atlanta Fed's GDPNow estimate of 0.5% real annualized GDP growth for the first quarter of 2017. It has collapsed in the past few months from the 3.25% estimate of mid-February. 

More importantly however, is the fact that the model now accounts for the residual seasonality adjustment that was applied to first-quarter GDP estimates after the repeated occurrence of low first-quarter GDP growth rates became an issue in 2015, which I discussed in several columns at the time. 

The germane point now is that, even after inserting an upward adjuster for first-quarter growth, it's still coming low enough not only to warrant concern about the economy by market participants, but mandate some kind of response by FOMC members. 

That response should include not only an acknowledgment of awareness of the situation but be evidenced further in not discussing things like shrinking the Fed's balance sheet. 

The totality of communications coming from FOMC members, however, suggests they are unaware of the immediate state of the economy, or that they don't think it's an issue and are assuming it is temporary. 

Regardless of what the reasoning is, I think it's probable that it is at least partially responsible for declining long-end yields as bond traders' concerns about awareness by FOMC members increases. 

I also do not expect that to change any time soon and that long-end Treasury yields and mortgage rates will continue to decline, stimulating housing activity and positive performance of homebuilders' stocks, at least for those with a focus on entry-level housing.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Arnold had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Financial Services | Basic Materials | Economic Data | Economy

More from Financial Services

American Express Tells Tale of 2 Trends Ahead of Earnings

Bruce Kamich
Jan 26, 2023 9:24 AM EST

The credit card giant's charts present a mixed picture in advance of its fourth-quarter results on Friday.

Glimmers of Hope, Debt Limit Farce, Netflix Narrative, Strapped Consumers?

Stephen Guilfoyle
Jan 20, 2023 7:53 AM EST

Plus, a bird's-eye view of which direction the S&P 500 Index could take from here.

There's Nothing Pretty About Volatile Goldman Sachs: Here's What to Watch For

Stephen Guilfoyle
Jan 17, 2023 10:25 AM EST

We have thought GS cheap for years. While the stock rallied significantly into mid-year 2021, it has done little since.

How to Trade Goldman Sachs as Shares Sell Off After Earnings

Bruce Kamich
Jan 17, 2023 9:22 AM EST

Let's see how deep this downward reaction may extend.

Bank of America: Why I'm Buying the Dip 'Ahead of the Storm'

Stephen Guilfoyle
Jan 13, 2023 10:45 AM EST

The size of provisions are scaring Wall Street a little right now.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • 02:53 PM EST REAL MONEY

    LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

    This Monday, Jan. 30, at 12 p.m., our very own exp...
  • 04:58 PM EST REAL MONEY

    The Latest AAP Podcast!

    Listen in as AAP Tackles Earnings, the Fed, Recess...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login