Homebuilders Still Rotting Despite Fed Cuts

Now that the Federal Reserve may be done cutting interest rates, it's worth taking a look at how the 325 basis points of cuts so far have helped the homebuilder stocks.

The answer: very little ... if at all.

Since Sept. 17, 2007, the day before the Fed first cut the fed-funds rate by 50 basis points to 4.75%, to Wednesday's 25-bp cut resulting in the current 2% rate, the SPDR S&P Homebuilders ETF XHB has fallen 6.4% vs. a 6.2% decline in the S&P 500.

Builder Stocks Slightly Underperform S&P Over the Fed Rate-Cut Period
	17-Sep	30-Apr	Gain/Loss
XHB	23.63	22.12	(6.4%)
S&P 500	1476.65	1385.59	(6.2%)
10-Year Note	4.47%	3.76%	(0.71) (change in bps)

At first glance, this seems rather surprising since the rate cuts were supposed to help the homebuilder stocks.

One stubborn problem is the 10-year Treasury note, which has not fallen as much as the short-term fed funds rate. The 10-year note is now at 3.76%, vs. 4.47% back in September, prior to the first Fed cut.

As the market moved from an inverted yield curve in fall 2007, which signaled a recession, to a now steeper yield curve, which signals an eventual recovery in the economy, homeowners have not seen much lower mortgage rates (since these are generally tied to the 10-year note).

The average 30-year mortgage rate in the U.S. is now 6%, down from 6.38% back in September 2007, but rates have been rising over the past two months.

A Tax Credit Farther

This is why the National Association of Home Builders on Wednesday applauded the latest Fed rate cut but called for more action by Congress to enact a temporary tax credit for home buyers.

Implicitly, this is an admission by the industry that monetary policy hasn't helped the builders much, and now fiscal policy must be used to bail out the industry.