Wednesday, December 06, 2006

Housing Stocks Surge in Response to Bad News and Lower Interest Rates

On Nov. 13 I wrote about the options-backdating scandal at KB Home and the resignation of the company's CEO and other top officials. The stock has rallied 20% since then. But it isn't the only homebuilder to surge in the past month. All the stocks in that sector are up including Hovnanian Enterprises and Toll Brothers.

Toll Brothers recently announced fairly lousy financial results, but gave some indication that it may be seeing the bottom. That helped boost the stock. Yet the housing stocks are also responding to lower interest rates. In fact, the rate for a 30-year mortgage is down 25 basis points over the past month to 5.58%. Investors are betting that lower rates will save the industry and once again spur demand for new homes.

Lower rates may stabilize the housing industry, but I seriously doubt we will see a surge in demand. This market is saturated. Speculators have already moved on to other things. Defaults are on the rise--especially in the sub-prime market. Foreclosures are also up. I don't see interest rates falling low enough to save those who are seriously overextended.