Housing Market Index Continues Climb by Todd Sullivan, ValuePlays
The National Assoc. of Home Builders reported the Housing Market Index (HMI) at 58 for Nov 2014. This level of the HMI has historically been associated with improvement to follow in New Single-Family Starts (SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB)). The housing recovery has been hampered by stifled bank lending due to a combination of tighter regulation and low credit spreads yet we have had improvement even though not as robust as in the past when credit conditions were more normal.
I continue to anticipate that higher 10yr Treasury rates should evolve as investors swap the very low returns (2.3% yields in 10yr Treas) for higher returns present in stocks. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) even with its volatility has provided a very competitive ~10% YTD. Historically, higher returns in Equities eventually draws capital from Fixed Income resulting in interest rate rises across all Fixed Income maturities. The impact in the cycle tends to be felt first in the longer maturities as they feel the greatest pain as rates rise. Only time will tell how this will play out in this cycle, but history provides insight in my opinion.Long Thesis For Exro Technologies
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Rising long term rates, especially mtg rates, should stimulate bank lending which should drive New Single-Family Starts back to historical levels. At 646,000 we are only running at half the 1.2mil trend shown in the chart below. Normalization should be very positive for construction related employment and housing issues.
All economic trends continue to forecast higher Equity prices/lower Fixed Income prices.