Investors wary of rising mortgage rates despite strong builder confidence

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Published July 16, 2013

| Reuters

An odd thing happened after data released Tuesday showed that the homebuilder confidence index rose to its highest level in almost eight years - housing stocks barely moved on the news.

Wary of rising mortgage rates, investors are choosing to stay on the sidelines rather than celebrate indications of a firming economic recovery.

Homebuilder confidence rose in July to its strongest level in 7-1/2-years as tightening supply and solid demand fueled the sector's recovery, data from the National Association of Home Builders released on Tuesday showed.

The index almost exclusively covers private builders but shares of publicly listed builders generally tend to move.

Shares of the largest U.S. homebuilder D.R. Horton Inc , No. 3 Lennar Corp and Toll Brothers Inc , the market leader in luxury homes, were all flat in afternoon trading on the New York Stock Exchange. Shares of No. 2 builder PulteGroup Inc fell 1 percent.

The wider S&P 500 index was down marginally on Tuesday.

"Right now we're just in a very volatile period where interest rate concerns really are outweighing the other demand side of the equation," Williams Financial Group analyst David Williams said.

Mortgage rates have been rising since May and touched their highest level in two years in the first week of July, hurting housing demand.

The Dow Jones Home Construction index has tripled since October 2011, when news of a recovery in housing demand started trickling in.

But it declined about 10 percent over the last few weeks after U.S. Federal Reserve Chairman Ben Bernanke suggested the central bank could ease spending if the economy continued to recover.

SUPPLY CONSTRAINTS

Investors' reaction also suggests that many are now looking beyond housing demand and studying supply concerns that are being caused by stricter lending rules and shortage of labor.

D.R. Horton's stock recorded its largest percentage jump in 5-1/2-months on July 11 after unemployment data suggested a healing in the labor market.

While investors are playing a wait-and-watch game, analysts' projections indicate that the rising interest rates are just a hiccup in the recovery.

"Severely constrained existing home inventory, historically low mortgage rates, and improving buyer confidence are creating positive momentum for rising home prices this year," Raymond James analyst Buck Horne wrote in a client note on Tuesday.

D.R. Horton is trading at about $21, below its intrinsic value of $27.93 as measured by Thomson Reuters StarMine. The model is a measure of how much a stock should be worth currently when considering expected growth rates over the next 15 years.

PulteGroup trades at about $19 versus an intrinsic value of $26.60. Lennar is at $35.42 compared with $37.01.

(Editing by Sriraj Kalluvila)

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