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Investing in the U.S. Housing Rebound

Written By Brian Hicks

Posted July 18, 2013

Recently, Wells Fargo (NYSE: WFC) and JP Morgan unveiled their Q2 numbers, and concerns rose again regarding the rapid decline being observed in mortgage refinancing as a result of spiking interest rates. That, of course, is leading to broader concerns about the nascent housing recovery in general. On the other hand, should we really be this concerned about the rising rates?

Consider that refinancing had already been going down since sometime earlier this year—before the past two months or so when rates really started rising, as the Financial Times notes. That obviously would have a cooling effect on the subsequent volume of refinancing. Then again, refinancing actually isn’t a major component involved in this whole system—not nearly on the scale of, say, housing construction activity. The Financial Times quotes RBC Capital to clarify this issue:

“It continues to amaze us that the back-up in mortgage rates is being characterized as the potential death-nail for the housing market. Let us state this emphatically once again: the relationship between mortgage purchase applications and mortgage rates in the current cycle is nonexistent. While these variables were strongly correlated in normal times (between 1990-2007), this relationship was flipped on its head following the collapse of the housing market. If we are now indeed “normalizing,” mortgage purchase applications/home sales still have room to rise even if rates keep moving higher.”

We’re not quite saying that we should ignore the rising rates, but it seems to be worth calling into question why we’re panicking over rising rates if, in fact, they aren’t the dealbreaker they are supposed to be. Remember that on a historical scale, these rates (even accounting for the spikes) are still very low. And there is a definite momentum that has been achieved in the housing recovery already, which is likely to propel things forward significantly. What we may observe, however, is that the recovery will be a bit more inconsistent than we had anticipated.

And the lenders are adapting to this oddly mutating market. The Dallas News reports that Bank of America (NYSE: BAC) decided just earlier this week to lay off some 400 employees in the Dallas area who’re engaged on problematic mortgage operations. Meanwhile, has decided to double the number of jobs it expects over at its Plano office—they’re thinking about the possibility of 1,000 new jobs.

The company is in the business of originating home loans. As interest rates keep rising, companies are working like mad to find ways to supply more mortgage funding in order to encourage buyers to keep buying. Consider that even as home loan refinance applications touched their lowest point in about two years, home purchase loan applications are still leading last year’s figures—some 16 percent beyond where things were at this time in 2012. People still want to buy housing, and right now companies are engaged in figuring out how to make that process smoother.

General recovery in housing continue

Companies like the Ryland Group (NYSE: RYL) and KB Home (NYSE: KBH) are both up on these movements in the market. The former is a large building company and has been snapping up land while retaining low inventory—all against surging demand. KB Home, meanwhile, expects major profitability through this year due largely to its strong positions on land, financial flexibility, and the ongoing momentum in the housing recovery.

MarketWatch also lists a few other stocks to watch out for. FlexSteel Industries (NASDAQ: FLXS) is a residential and commercial furniture manufacturer, and they’ve been returning yields of 2.4 percent or thereabouts recently. Graco (NYSE: GGG) is a maker of spray pumps for house paint. Given the general market conditions, it’s reasonable to expect such a company to see a fair bounce in business, which makes Graco a worthwhile stock.

Ben Bernanke’s recent comments, reiterating the Fed’s commitment to keeping interest rates low for the foreseeable future, appeared to reassure the finicky housing market.

As of the latest, Bernanke pointed out that the Fed intends to keep short-term interest rates at their present levels or lower even if unemployment goes below 6.5 percent (that, if you recall, is the point at which the Fed previously indicated it might begin to tighten its monetary policy). Overall, the SPDR S&P Homebuilders is up 3.6 percent as a result, while the Dow Jones and S&P 500 both hit record highs, reports Zacks.