A Fed rate hike will make it a bit more difficult for Americans to buy homes, but the outlook for the housing market and for the homebuilding stocks remains strong. So argues RBC Capital Markets analyst Robert Wetenhall.
The Federal Reserve is widely anticipated to raise target interest rates from ultralow levels in December. This creates a natural concern for investors in the housing market, given that houses are usually purchased with borrowed money. As the federal funds rate rises, other key rates are expected to rise along with it, effectively making it more expensive for consumers to buy homes.
The question is how much more expensive. With the Fed expected to only raise its target range by 25 basis points — from near 0 to 25 percent up to 25 to 50 percent — the immediate extra cost for buyers should not be game-changing, Wetenhall said.
"We looked at the correlation between Fed tightening and 30-year conventional mortgage rates. So a 25-basis-point move by the Fed would probably lead to 30 basis points of inflation on a 30-year conventional mortgage. If we assume that the current rate rises by 30 basis points from 3.9 percent to 4.2 percent, it's only an extra $50 [per month] for the average house sold today," Wetenhall said Monday on CNBC's "Trading Nation."
"We expect that most consumers today looking at rent-versus-own can afford that $50 hit. Accordingly, we expect strong demand in housing to persist, which is great for homebuilder stocks," Wetenhall said.
After all, he said, unemployment is dropping and wages are rising, which should keep housing demand strong.
His favorite picks in the sector are DR Horton, PulteGroup and home appliance company Whirlpool.So far in 2015, those names have risen 28 percent, fallen 10 percent, and fallen 15 percent, respectively.