Investment Contrarians

Well-Known Stocks to Avoid as Mortgage Rates Rise

By for Investment Contrarians |

Mortgage Rates RiseWell, that didn’t take long. Over the past few months, I’ve been warning readers that higher interest rates are coming, and this will affect millions of Americans through increased levels of mortgage rates.

In just the last couple of months, we’ve seen the rates for mortgages jump significantly. While many pundits believe that the housing market could continue at its torrid pace in spite of higher mortgage rates, the evidence appears to show just the opposite.

Two recent data points in the housing market indicate, in my analysis, that mortgage rates are indeed having an impact on the market.

New residential sales for July 2013 were 394,000 on a seasonally adjusted annual rate, a drop of 13.4% from the level in June, according to the U.S. Census Bureau. (Source: U.S. Census Bureau web site, last accessed August 28, 2013.)

Following that dramatic drop in new sales, we just got a report on pending home sales. Pending sales are a forward-looking indicator in the housing market, and this report shows the contracts that have just been signed.

The Pending Home Sales Index for July was 109.5, a drop of 1.3% from June, according to the National Association of Realtors (NAR). In the report, the organization specifically cited higher mortgage rates as having an impact on lower levels of pending sales. (Source: “July Pending Home Sales Slip,” National Association of Realtors web site, August 28, 2013.)

I’ve always been a big advocate for using data from multiple sources. Here are two separate organizations that are clearly showing higher mortgage rates are indeed having an impact on the housing market.

This should not be news to my readers, as I’ve clearly warned about this impact before. The real shocking fact is that mortgage rates are still historically at very low levels.

If the housing market is already being impacted by this increase in mortgage rates, what will happen when these rates rise to historical averages? I think the housing market will have significant hurdles to overcome, especially the homebuilder stocks.

While it is true that the homebuilder stocks have sold off recently, I still reiterate my warning over the past few months that investors should steer clear of these companies.

Think of it this way: are mortgage rates more likely to rise or drop over the next few years? As I stated many times over the past year, I believe higher interest rates—and therefore, higher mortgage rates—are here to stay.

If the housing market is already seeing an impact from higher mortgage rates, even though they’re still relatively low on a historic basis, any further rise in mortgage rates will have a greater effect on the housing market.

Because the homebuilder stocks have so much positive news priced into them regarding the housing market, it would take a massive continuation of the housing market for them to keep going up in price. If mortgage rates move higher, this again will have a negative impact on the housing market, and I don’t see the recent bull market continuing for homebuilder stocks.

The easy money has already been made in homebuilder stocks, and I would avoid them until they’ve reached a valuation level that is more in line with a housing market that can absorb increased levels of mortgage rates.

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