Interest Rate Spike Hits Builders At First

August 02, 2013, 13:47 pm ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The housing sector benefited from a strong demand for homes and surging investor confidence during the first 4 months of 2013. However, the sector plunged close to double digits in the month of May, and the decline continued after the recent FOMC meetings. 10-year U.S. Treasury yields are rising and this could cause investors in REIT’s and homebuilder stocks to become even more bearish. Even if the housing market remains strong, higher interest rates will add pressure to homebuilders like Lennar Corporation (NYSE:LEN), KB Home (NYSE:KBH) in terms of slower sales and lowered revenue expectations. Homebuilders have anticipated huge amounts of revenue over the next few years and with the Fed’s inevitable tapering later in the year; interest rates are likely to rise soon.

The Homebuilder stock index has tripled in the past 2 years, so it is likely that those gains have already been priced into the housing stocks. In addition to rising rates, any negative news for homebuilders could send the stocks much lower.

In May you could have purchased a 30 year fixed mortgage for 3.5%, that same 30 year fixed mortgage now costs over 5%. Who is going to want to buy a home with an increase like that in just a few months? With such an increase in mortgage payments do not expect to see potential new homebuyers scrambling to buy a home. The initial spike in rates caused buyers to rush to buy homes immediately fearing that rates had bottomed. However, that kind of knee jerk reaction is often short lived.

ProShares UltraShort Real Estate (ETF) (NYSEARCA: SRS), the double short on real estate, has been up about 5% in the past few days, reacting to the most recent spike in rates.  This is a volatile instrument, but it tells you exactly how sensitive these stocks are to interest rates.  According to the report offered by Stock Traders Daily, SRS is strong near term, and when you have a strong-short ETF you can tell the sector is under pressure. ProShares Short Real Estate ProShares (NYSEARCA: REK) has also been trading higher. As you would expect, the report for ProShares Ultra Real Estate (ETF) (NYSEARCA: URE) looks almost opposite right now, but there are clear inflection points for each of these.  Bottom line is we will likely see a major dip in new and existing home sales, which will not be good news for housing stocks.

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