Last summer, as long-end U.S. Treasury yields were plumbing record lows, I expected that trend to continue and set the stage for record-low mortgage rates and a steep increase in first-time homebuyer activity that would be bullish for Hovnanian Enterprises (HOV) and Beazer Homes USA (BZH) , as I initially discussed in the column, "Rates Eventually Should Rate First-Time Home Buyers' Attention."
Almost simultaneously with that publication, first-time homebuyer activity peaked and Treasury yields and mortgage rates both began to rise. Interestingly, though, rather than decline, the stock price of both builders began to rise.
That process continued into September and appears to have been predicated on the belief that the increase in mortgage rates would cause demand to be actualized as first-time buyers tried to close on a purchase before the rates rose further.
This didn't happen, though, as I discussed in the October column "Housing Activity Shows No 'Paradox of Thrift'."
As investors realized that first-time homebuyers would not respond positively to rising mortgage rates, the stock price for both builders began to decline again, and continued to do so right up to the U.S. elections.
The themes of pent-up housing demand, the paradox of thrift and the expectation that rising mortgage rates would cause first-time homebuyers to increase their purchase activity are not new. A very similar situation occurred during the second half of 2013 as Treasury yields and mortgage rates spiked in what became known as the taper tantrum.
Even as mortgage rates were rising at the fastest rate in history and home purchase activity was declining commensurately, the stock prices of the builders of single-family dwellings rose along with Treasury yields and mortgage rates.
I discussed the probable negative consequences for the homebuilders' stocks at the time in the column, "Mortgage Rates Are Rising Faster Than Ever."
As soon as investors realized that buyers would not respond positively to higher mortgage rates, the stocks of the builders began to decline, and continued to do so for the next 2½ years, with Hovnanian and Beazer steadily declining during that period and eventually losing about 75% of their value.
What's most interesting about that period is that even as the builders' stocks were falling, so were Treasury yields and mortgage rates.
In essence and actuality, traders and investors were exhibiting a belief that higher mortgage rates were a positive signal for home purchase activity and that lower mortgage rates were a negative.
I honestly don't know how this logic set in with traders, but it clearly did and in the extreme in both directions, and wrongly during both the increase in rates in 2013 and the decrease in rates that occurred during the next 2½ years.
And yet, that logic is being exhibited again by traders and investors.
Following the elections and the spike in both long-end Treasury yields and mortgage rates, the stocks of the homebuilders are again rising, even as home purchase activity is again declining, just as it did in 2013.
In the past two months, the increase in Treasury yields and mortgage rates has been on par with the record-setting pace of increase that occurred in 2013, and yet the stock prices for Hovnanian and Beazer have increased by about 85% and 45%, respectively.
What appears to be happening is that traders and investors are exhibiting a belief that demand is a function of confidence rather than a function of capacity.
It is in reality, however, a function of both, but with capacity being the most important. Without the financial capacity to purchase, confidence is irrelevant.
The increase in mortgage rates reduces capacity by definition, and logically should cause traders and investors to anticipate that home purchase activity will decrease and thus negatively impact the homebuilders.
But again, that's not yet happening, although it is probable that this reality will sink in with traders and investors again soon, just as it did in 2014 after the taper-tantrum rate spike and commensurate decrease in home purchase activity.