Shares of some top homebuilding companies jumped during the trading session on Thursday, Jul 11, on Federal Reserve Chairman Ben Bernanke’s comments to keep interest rates low for sometime and continue to support the U.S economy by maintaining an ‘accommodative’ monetary policy.
After market close on Wed, Jul 10, Bernanke commented that Fed plans to keep the short-term interest rates at record low even if the unemployment rate falls below 6.5%, which is Fed’s current benchmark to consider a tight monetary policy.
Stocks of both large homebuilders like D.R. Horton, Inc. (DHI - Analyst Report), PulteGroup, Inc. (PHM - Analyst Report), Lennar Corporation (LEN - Analyst Report) and Toll Brothers (TOL - Analyst Report) as well as smaller ones like The Ryland Group, Inc. , Meritage Homes Corporation (MTH - Snapshot Report), KB Home (KBH - Analyst Report) and MDC Holdings Inc. (MDC - Snapshot Report) rose on Bernanke’s comments. Prices of these companies rose in the range of 6%-9% as homebuilding stocks are most sensitive to the outlook of interest rates.
Low interest rates increase demand for new homes as mortgage loans become cheaper; thus improving the purchasing power of the buyer. Homebuilders have largely benefited from historically low interest rates, eventually leading to the sharp increase in home buying activity since mid-2012.
The broader housing market also enjoyed a strong rally and the SPDR S&P Homebuilders (XHB) jumped 3.6%. Moreover, the Dow Jones and S&P 500 index surged to record highs on the news.
The Fed is currently buying $85 billion in government bonds and mortgage backed securities a month, known as quantitative easing, to keep interest rates low and boost economic growth. Last month, Bernanke had announced plans to scale back this bond buying plan and instead adopt a tighter monetary policy to avoid deflation. The U.S. markets tumbled on the news.
Especially, investor confidence in the overall housing recovery was shaken due to concerns of rising interest rates if a tighter monetary policy was implemented. Bernanke’s recent comments have put these concerns to rest, at least for some time