Will The Fed Rate Hike Dent Housing Stocks In 2016?

The Federal Reserve raised interest rates for the first time in more than eight years at its Dec 16 meeting – clearly indicating its rising confidence in the U.S. economy. The last federal fund rate hike happened in 2006. The Fed has kept interest rates near zero since Dec 2008.

The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50% as policy makers unanimously voted in favor of a rate hike. Strong October/November employment numbers, declining unemployment rates and improving consumer confidence fueled the lift-off.

The Fed rate hike has assured investors that the U.S. economy is resilient enough to bear future increases in borrowing costs.

Fed Rate Hike & Homebuilding Stocks

Many have been concerned about the relationship between housing and interest rates and its impact on homebuilding companies like Lennar Corp. (LEN – Analyst Report), D.R. Horton, Inc. (DHI – Analyst Report), Toll Brothers, Inc. (TOL – Analyst Report), PulteGroup, Inc. (PHM – Analyst Report), Meritage Homes Corp. (MTH – Snapshot Report), KB Home (KBH – Analyst Report), and many others.

A hike in the federal fund rate would probably push mortgage interest rates up with it. High mortgage rates dilute demand for new homes, as mortgage loans become expensive. This lowers a buyer’s purchasing power and can hurt homebuilders’ volumes, revenues and profits.

Mortgage rates, in tandem with interest rates, have been at historical lows since 2008. Homebuilders have largely benefited from these low mortgage rates that led to a sharp spike in home buying since 2012.

This has specifically been a good year for the housing market, possibly the best since 2007 when the housing recession had set in. In case mortgage rates rise with the interest rate hike, we believe they should still be reasonable, keeping housing affordable.

Moreover, the Fed has clearly emphasized that the pace of rate hike will be slow and gradual. Modest hikes in interest rates in the context of an improving economic environment can be a net positive for the housing sector. Stronger general economic conditions can encourage consumers to form new household, leading to higher housing demand.