Why the Housing Market Is Eyeing the Fed’s Bond-Buying Strategy

The Housing Market Is Eyeing the Fed’s Bond-Buying StrategyThe housing market is on full alert as interest rates are edging higher after the Federal Reserve said last week that it may have to reduce its bond buying each month.

Data just came out from the Mortgage Bankers Association that showed the rise in the average contract interest rate for 30-year fixed-rate mortgages has risen 12 basis points to 3.90%, representing the highest level since May 2012. For 20-year mortgages with a balance in excess of $417,500, the rate jumped 14 basis points to 4.07%. (Source: Robinson, M., Mortgage “Applications Down 3rd Week as Rates Jump,” Mortgage Bankers Association web site, last accessed May 30, 2013.)

The impact of the higher rates on the housing market is clearly seen in the demand for mortgage applications, which declined for the third straight week. For the refinancing segment of the mortgage market, the demand plummeted 12% to the lowest point since December 2012.

Now I’m not saying the housing market is set for a collapse, but you need to be careful and take some profits off the table, which is always a prudent strategy to undertake. (Read: “Why Greed Is Not Your Friend When It Comes to Investing.”)

Based on my technical analysis, the chart of the S&P Homebuilders Index below shows the current hesitancy to move higher at the upper resistance, as indicated by the top blue line. If you look back to December 2012, there’s clearly a chance that prices can falter back to the lower support level, as indicated by the red oval in the chart below.

SPDR S&P Homebuilders Chart

Chart courtesy of www.StockCharts.com

The reality is that the move away from the recession and subprime mortgage crisis has been superlative, but I feel some pausing may be due in the housing market.

Just take a look at home prices in the top-20 housing markets nationwide, which surged 10.9% in March, according to the S&P/Case-Shiller Home Price Index. March was the 14th straight up month for prices for the housing market and the highest in six years, so you understand my concern.

Of course, the Fed may be inclined to leave its aggressive stimulus in place due to the high unemployment rate, which continues to be well above the Fed’s target rate of 6.5%—it isn’t expected to fall to this level until 2015 or later.

While the jobs will come, the Fed also knows it must control any bubble-like conditions or risk the threat of another implosion, which is not what you want to see at this time.

This is why the Fed will need to inevitably take its foot off the throttle and ease off on the stimulus. This doesn’t mean the economy and housing market will crash and burn, but the easy money in the stock market will be a thing of the past until the next great bull market.