Mortgage rates hit 6% after strong sell-off in bond market

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Rising mortgage rates are cooling the housing market, providing some relief to homebuyers.

Justin Sullivan/Getty Images

Mortgage rates hit 6% after a strong sell-off in the mortgage-backed securities market, a development that could further dampen the housing market.

Rocket Mortgage advertises on its website a 6.25% interest rate for 30-year fixed rate mortgages for the purchase of new homes. Mortgage rates have doubled since the start of the year, stretching housing affordability, especially for first-time home buyers. Mortgage rates vary somewhat depending on the creditworthiness of the home buyer.

“With MBS (mortgage-backed securities) yields, the 30-year fixed mortgage rate jumped 60 basis points [basis points] over the past two days as investors grappled with the implications of Friday’s CPI report,” Stephen Kim, the residential construction analyst at Evercore/ISI, wrote in a client note on Tuesday. Sixty basis points equals 0.6 percentage points.

Barrons wrote on Monday that the cooling housing market should offer some relief to homebuyers who have faced steep price increases and bidding wars over the past year.

Homebuilding stocks fell during Monday’s sharp decline in stock markets, and many are now trading at or below book value. This could signal that stocks are near a bottom, as book value is likely a conservative liquidation value for companies that remain highly profitable.

The


iShares US Home Construction Exchange Traded Fund

(ticker: XHB) fell 5.4% on Monday and hit a fresh 52-week low, leaving it down 35% from its 52-week high in December. The ETF rose 0.7% to $53.83 in early trading on Tuesday.

The weekly survey

Freddie Mac

showed a 30-year average mortgage rate of 5.23% nationwide last week. Kim wrote that the Freddie Mac survey would likely head for 5.85% in the coming weeks, while other mortgage news sources would likely show rates above 6%. For a $400,000 mortgage, a rate of 6% translates to monthly payments of $2,400 per month, up from $1,700 at the end of 2021, when rates were 3%.

“This steep and disruptive rise in mortgage rates could temporarily depress demand even below the depressed level of supply that exists in many markets as homebuyers acclimate to this new level of borrowing costs. “, wrote Kim.

The mortgage securities market was hit hard on Monday due to the massive sale of Treasury securities.

Reflecting losses in the mortgage-backed securities market, the $20 billion


iShares MBS Exchange Traded Fund

(MBB) fell 2.4% on Monday to $94.74 and hit a new 52-week low. A decline of more than 2% in mortgage securities in a single session is a rare event. The ETF is down 11% since the start of the year.

Homebuilding stocks languish despite current high profitability as investors fear a slowdown in the coming months due to affordability concerns and a potential weakening economy.

Toll Brothers

(TOL), the nation’s largest luxury homemaker, rose 0.8% on Tuesday to $44.53, after falling 6% on Monday. It is now trading below its book value of $46 per share at the end of its quarter that ended in April. Toll stock is down 38% so far this year.

Lennar

(LEN), the 2nd homebuilder behind

DR Horton

(DHI), is down 0.2% on Tuesday at $69.85 and trades at a book value of around $70 per share. Lennar’s High Voting Class B shares (LEN/B) are trading at a 17% discount to more liquid voting shares, at around $58. It is unusual for voting shares to trade at such a discount to common shares. Horton shares are up 1% at $67.22 on Tuesday.

Kim, who has been among the most optimistic housing analysts, wrote on Tuesday: ‘We continue to believe that a lack of housing inventory and rising rents will support home prices even amid a buyers’ strike. , while the decline in lumber may more than offset the impact on margin. a return of incentives to builders. Meanwhile, small-cap homebuilding stocks are trading just 5% above 0.8x P/TBV (price to tangible book value) – a level that has always held except in the worst recessions – and we expect book values ​​to rise more than 20% over the next year.

Home builders have rarely been in better shape financially and operationally. Debt levels are down and profits are at record highs. Companies have returned significant amounts of shares to holders in share buybacks and higher dividends. Toll and Lennar report around 2%.

An upbeat Kim wrote that when homebuilding stocks have hit such low valuations in the past, they’ve typically risen around 100% over the next 12 months. According to him, the book value should serve as a floor under the shares.

Write to Andrew Bary at [email protected]

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