There’s a lot of fuss about rising interest rates right now. But one area of the market that investors shouldn’t worry about is housing stocks.
Because while an increase in mortgage interest rates will indeed increase monthly payments, don’t think for a second that the impact will be severe — or that the rise alone will deter buyers.
It’s hard not to be hysterical, I know. The yield on a 10-year T-Note spiked to roughly 2.7% — a two-year high — in June. Bernanke is tamping down talk of tapering that is creating a new “pain trade” on Wall Street.
That’s bad enough. But consider that investors also are already sitting on front-loaded returns in many related housing plays. The SPDR S&P Homebuilders ETF (XHB) is up 35% in the past 12 months to almost double the S&P 500 Index, led by 67% gains in PulteGroup (PHM) and 74% gains in KB Home (KBH).
Secondary plays also have soared in the past 12 months, including 50% gains in home improvement retailer Home Depot (HD), 37% gains in paint giant Sherwin-Williams (SHW) and 80% gains in appliance manufacturer Whirlpool (WHR).
It all adds up to uncertainty and a lot of incentive to take money off the table and flee, right?
Not so fast.
For starters, the housing market functioned just fine for decades with interest rates double or even triple the current levels. In fact, 30-year mortgage rates touched 6% in 2005 — during the midst of the housing boom that got us into this mess. In 2000, rates were around 8% on a 30-year. In the late 1980s, rates were in the double digits. Check out this chart from Pragmatic Capitalism for context:
So don’t let your recency bias about what’s low and what’s high fool you. Expectations will have to adjust, but clearly we are a long way from any kind of record.
Also, according to a mortgage calculator at Bankrate.com, a 30-year fixed rate mortgage at 3.5% interest on a $200,000 home results in payments of $898.09 per month; at 4.5% interest it’s up to $1,013.37. Not to be callous, but more people pay that difference in their monthly cable bill — if $115 per month makes or breaks your entire family budget, you shouldn’t be buying a house to begin with because there’s no room for error.
That’s not to say some people won’t get squeezed out, and that housing prices may cool off a bit as a result. And it’s worth noting that folks dedicating an extra $115 per month to mortgages is another mild headwind for consumer spending amid persistently high unemployment, stagnant wages and this year’s payroll tax increase.
But given the red-hot recovery in housing, with prices up by double digits year-over-year in major markets, there’s room for a little pushback. So don’t sweat interest rates toppling the housing recovery anytime soon.
- Cullen Roche’s full post on why investors should stop freaking out about very scary short-term charts without context. (Pragmatic Capitalism)
- Oh yeah, here’s why higher interest rates might be bullish for U.S. home sales too. (Reuters)
- It’s official: Housing has recovered. (MarketWatch)
- Goldman says Treasuries will hit 4% by 2016, if you care about these kind of forecasts. (CNBC)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP.