NEW YORK (Real Money) -- Maybe interest rates on U.S. Treasuries just went too high to begin with? Maybe the real flaw with our view on interest rates is that, in retrospect, the summer 2013 rise was an overreaction to the potential end of the government's bond-buying -- and that the 10-year should not have gotten as close to 3% yield as it did.
That's probably the most important conclusion that came out about housing in Tuesday's Home Depot (HD - Get Report) conference call. Given that nobody has a pulse on homeowners, homebuilding and home remodeling like CEO Frank Blake does, I have to take it as gospel that he is right.
We all accept that rates now have a desire to go lower. We have all sorts of different interpretations why that is: supply that's not as big, foreign buying, bigger tax receipts, a slowing demand.
But Blake is the first one to single out the anomaly of the rate rise and how it really crimped one of the great comeback engines of our economy. "Mortgage rates," Blake pointed out, "took a pretty significant jump up in the summer of 2013, and you saw a not-surprising response to that in the housing market." He felt that the other surprise was the "strong housing-price appreciation" notwithstanding that rate increase.Now, Blake reiterated that housing is still affordable even after this run. He also pointed out that his key metric for sales growth is, indeed, that appreciation -- because people keep spending on their homes as they appreciate, as it is a terrific capital appreciation. But he also said that the household-formation portion of the home-buying equation still hasn't come back, and people aged 18 to 35 are still staying with their parents in abnormally high numbers. He regards that as a potential pent-up demand. In other words, Blake is saying: Don't sell your Home Depot stock because of the bad weather. When weather got good, the business came back. People are beginning to spend more money on the two areas that were hardest hit during the recession -- kitchen and window millwork. Moreover, they haven't even begun to spend as much as Home Depot had budgeted for outside projects. That's coming now. Still, I think the most important takeaway is that the surge in mortgage rates really decked the core businesses of homebuilding and home-buying. It's ironic that a nonbond guy -- someone in the trenches who is not worried about the polemics of the Federal Reserve or politics or the Tea Party or the deficit and quantitative easing -- just comes to a simple conclusion: Rates just shouldn't have jumped as they did. Maybe it has taken a year to realize that. Maybe rates are just correcting, and we should stop fretting about the rate decline and accept that rates shouldn't have gotten to those levels they reached, and that it was an overreaction to what was thought to be the consequences of the end of QE. The only question for me is whether the whole surprising move will be repealed. If that happens, you'll see that the Home Depot sellers will quickly have sellers' remorse -- and, judging by the fund flows, that's exactly what's happening. At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned. Editor's Note: This article was originally published at 7:14 a.m. EST on Real Money on May 21.