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Rising Interest Rates May Help Housing and Economy

  • Written by Syndicated Publisher No Comments Comments
    March 11, 2013

    Interest rates, mortgage rates, and bond yields have been rising some in recent months as the economic recovery has become more recognized.

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    If the unusually anemic recovery accelerates to a more normal recovery pace, rates will likely continue to increase from normal market influences. (And should the Fed become more nervous about its continuing easy money policies it could begin raising rates further under its monetary policies).

    Bonds do not like rising interest rates. In fact, bond prices move directly opposite to bond yields. The rule of thumb is that bond prices decline roughly 10% for each 1% increase in their yields.

    Stocks also do not like rising interest rates, which is where the old adage “Don’t fight the Fed” comes from. When the Fed begins cutting rates the market usually soon begins to rally. When the Fed begins to raise rates the market usually soon rolls over into a decline.

    In fact, there are two old time rules (developed by Edson Gould in 1973, and updated by Norman Fosback in the 1980’s) related to the Fed raising or lowering the Fed Funds rate. The first is “Two tumbles brings a jump”. It says that when the Fed begins to cut interest rates, after two cuts the stock market will begin to rally. The other is “Three steps brings a stumble”. It says that when the Fed begins to raise rates, after three increases, the stock market usually stumbles into a correction. (We have not checked the accuracy of those rules over the last decade or s0).

    But it is clear that neither bonds nor stocks like rising interest rates.

    However, in the current situation of record low interest and mortgage rates, rising rates could well be a positive for the housing industry, perhaps even for auto sales, and therefore the economy, at least in the beginning.

    I base that on the premise that would-be home-buyers seeing mortgage rates rise are likely to move more quickly to buy before mortgage rates rise further. (Perhaps car-buyers would have the same response to rising interest rates on car loans).

    There is some evidence from rising home prices that seems to support that thought.

    In reporting its recent earnings, national home-builder Toll Brothers said it has seen such an increase in sales that it has begun taking advantage of the demand by raising prices, and that has not only been a positive for the company’s profits, but has been an unexpected positive for sales, encouraging undecided homebuyers to take the plunge before prices rise further.

    The company’s CEO, Douglas Yearley, said, “The more and more we can raise prices, the more homebuyers feel a sense of urgency and that is materializing into additional sales.” (The company reported orders were up 40% year-over-year in the first three weeks of February).

    I suspect rising mortgage rates may have the same effect on home sales, at least in the beginning, which would be a positive for the economy even if rising rates would not be a positive for the stock market at some point.

    Comical Takes On Disbelieving the Bull Market!

    From The Financial Times: What looks like a rally may just be the effect of elites passing money among themselves!

    Huh? The S&P 500 is up 136% in its four-year bull market, and gained 2.2% last week, and it’s just an illusion? Just a few elites trading among themselves? The millions of investors in mutual funds and etf’s seeing their 401K’s and IRA’s making impressive gains are a few elites? I and my subscribers have gains including 12.1% in our Seasonal Timing Strategy just since its re-entry signal in November, and gains including 18.7% in the iShares Transportation etf (IYT), and 13.5% in the iShares Russell 2000 etf (IWM) in our market-timing strategy just since its latest intermediate-term buy signal in December. We’re just a few elites? What the heck is an elite anyway?

    The economic recovery is real. The bull market is real. The favorable season rally since the November low is real. They will end at some point, perhaps even soon. But they are real.

    Fundamental analysis is terrible at timing markets!

    The majority of investors and pundits still insist that technical charts and analysis are voodoo, that watching the fundamentals is the key.

    Sure it is. Latest example:

    The U.S. market  had a big week this week in reaction to continuing improvement in the U.S. economic recovery, and in anticipation of, and reaction to a positive employment report, and a drop in the unemployment rate to 7.7%.

    European markets also hit new rally highs this week. But the 17-nation euro-zone is in a recession with no bottom in sight. This week’s reports showed it  is worsening, and its unemployment rate rose to 11.9%.

    Totally opposite fundamentals but the same market action?

    Only the technical charts and indicators continue to have the action of both markets nailed, in spite of the opposite fundamentals.

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    To read my weekend newspaper column click here:  What Investors Need to Realize After Terrific Jobs Report!

    Subscribers to Street Smart Report: There is an in-depth ‘Gold, Bonds Dollar, Commodities’ report from Thursday, and the new issue of the newsletter from Wednesday, in your secure area of the Street Smart Report website. There will be an in-depth ‘Global Markets’ update there early next week.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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