New Home Sales Impressed Wall Street while GDP Disappointed

All Eyes Are on Last Jobs Report before June FOMC Meeting

(Continued from Prior Part)

Week in review

The week ending May 27 was dominated by a big upward surprise in new home sales and a disappointing GDP revision on Friday. New home sales came in at an annualized rate of 619,000, the highest since early 2008. New home sales can be an extremely volatile number with a wide margin for error.

The second revision to first quarter GDP came in at 0.8%, which was slightly below the 0.9% Wall Street estimate. Still, this was an upward revision to the first estimate, which came in at 0.5%.

Implications for mortgage REITs

Last week, bond yields rose to 1.9% in what was a dull week of trading where bonds barely moved. Bond investors have been adjusting to the FOMC minutes from two weeks ago where the Fed warned markets they were underestimating the chances of further rate hikes this year.

A more hawkish Fed is generally bad news for agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). Rate increases impact the REIT sector mainly by increasing the cost of funds. Recently, the FHLB (Federal Home Loan Bank) tightened its eligibility requirements. REITs that have been using the FHLB will lose access to a particularly cheap source of capital.

Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT). If you’re interested in trading in the mortgage REIT sector through an ETF, you can look at the iShares Mortgage Real Estate Capped ETF (REM).

Implications for homebuilders

Homebuilders such as PulteGroup (PHM) and CalAtlantic Group (CAA) were focused mainly on the new home sales data. Homebuilders still lack the confidence to really push out volume. However, if that number stands, it could indicate that this lack of confidence could change. Meanwhile, pent-up demand continues to build. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Why the Jobs Report Will Dominate the Week Ahead

• Part 3 - Bond Yields Inched Higher during Dull Week

• Part 4 - Mortgage Rates Were Flat after a Dull Week in the Bond Market