Bond-Buying Lays Foundation for Homebuilders

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More bond-buying means lower interest rates means more home-buying.

At least for now.

That’s the thinking that quickly boosted shares of local homebuilders KB Home and Ryland Group Inc. last week after Federal Reserve Chairman Ben Bernanke announced that the Fed will continue its bond-buying program. That should hold down interest rates on government bonds and home mortgages, potentially goosing the housing market.

Within minutes of Bernanke’s Sept. 18 announcement, shares of Westwood’s KB Home jumped nearly 5 percent, while shares of Westlake Village’s Ryland rose nearly 4 percent.

Both stocks finished the week among the top gainers on the LABJ Stock Index, with Ryland ending the week up 11 percent and KB up 7 percent. (See page 40.)

Shares of homebuilding companies have been closely tied to mortgage interest rates of late. Average mortgage rates bottomed out in early May, just as KB and Ryland stocks were approaching postrecession peaks.

But after the Fed signaled it might cut back on bond-buying, investors pulled money out of bonds and rates started to climb as homebuilders’ stocks fell. Between mid-May and the beginning of this month, KB and Ryland stock lost about one-third of their value.

As rates rose, mortgages became less affordable and homebuilders saw sales soften, said Drew Mackintosh, Ryland’s vice president of investor relations.

“When you get as sharp a move as we did in the middle of the summer, we did see a bit of a pause in our business,” he said.

KB Home executives declined to comment, saying the company is in a quiet period before announcing earnings.

Bonnie Baha, head of the global developed credit group at downtown L.A. bond investor DoubleLine Capital, guessed that last week’s news could boost housing sales, but only in the short term; interest rates must eventually rise.

“There might be people who thought about purchasing a home and now think they have a second chance to buy before rates rise again,” she said.

But she also said there’s a reason the Fed chose not to taper the bond-buying program: The economy isn’t growing enough, which could mean weaker than expected demand for new homes.

“We need sustainable improvement in employment to fuel a housing recovery and we’re not seeing that,” Baha said.

Mackintosh said the benefit of the Fed action cuts two ways.

“Lower interest rates make owning a home more affordable, which is good for our business,” he said. “But over the long term, the fact that Bernanke decided to postpone tapering due to weakness in the economy is a bad thing for the long-term health of our business.”