2 Stocks Set to Win From Rising Mortgage Rates
Jul 8th 2013 2:17PM
Updated Jul 8th 2013 2:18PM
The U.S. housing market's own Freddie Mac recently released its 2013 First Quarter Refinance Report, and while I'm not going to argue that there isn't certainly more exciting reading out there, there are some very interesting tidbits throughout the report that offer up some clues as to the state of the housing market and some stock ideas that Foolish investors may be able to glean from it all.
The refi boom is winding down
"We estimate that refinances will make up approximately two-thirds of single-family originations this year and about one-half in 2014, compared to about 70 to 75 percent in 2012."
This makes sense. While the Fed has committed to keeping short-term interest rates near zero until we see unemployment reach 6.5%, all this taper talk is playing out in the mortgage markets, which are already on the move back up. Given the volume we've seen to this point along with Freddie's projections, it certainly seems like the refinance boom is coming to a close.
"My home is an ATM" syndrome
"An estimated $8.1 billion in net home equity was cashed-out in the first quarter of conventional prime-credit home mortgages, down from an estimated $8.2 billion in the fourth quarter and substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006."
Just amazing, the difference between now and then. When you hear the statement "people were treating their homes like ATMs," this is the indisputable proof that this was in fact the case. From $84 billion down to $8.1 billion is just a phenomenal difference.
"The program has helped about 2.5 million refinancing borrowers since its inception through March 2013. HARP loans made up just over 20 percent of first quarter refinance loans purchased by Freddie Mac and Fannie Mae. ... Homeowners who refinanced through HARP during the first quarter of 2013 will save an average of $4,300 in interest payments during the first 12 months, or about $358 every month."
Hey, every little bit helps. And it's also worth noting that HARP has been extended through 2015, which means that there are still borrowers out there who can take advantage of a serious saving opportunity.
The house always wins
I like to believe there's a pretty good chance that after all of this refinancing, many people are going to stay put for a while. Home repairs and renovations should see a nice little boost in the coming years, and Home Depot is a great way for investors to gain worthwhile exposure to this sector.
Home Depot is the largest player in the space with a market capitalization more than twice the size of competitor Lowe's, and thanks to this scale it maintains better margins, making it more profitable. And management is keeping an eye out for shareholders as well. Share count is down 14% over the last five years and the stock pays a 2% dividend to boot. Home Depot has pulled in almost $6 billion in free cash flow over the last 12 months, and at 25 times earnings, today the market is as optimistic about the stock as I am. But for investors looking five to seven years out, Home Depot is a great stock to build a position opportunistically over time.
Coffee giant Starbucks is a phenomenal business in many ways. Management is doing everything they can to make Starbucks that home away from home for consumers while at the same time bringing Starbucks into the home via things like the Verismo machine and a laser focus on the channel development (packaged goods) segment.
Between international opportunities and three big acquisitions over the past couple of years, management's target of 10% or greater revenue growth on a sustainable annual basis seems more achievable now than ever before. As households start to see a little more money in their bank accounts, Starbucks is one of those creature comforts with a relatively low hurdle in convincing people that they have the money to treat themselves to something that they may not have otherwise.
With the stock at 35 times earnings, the market's feeling the love for the 'Bucks today. But this is one of the most recognized and reputable brands in the world with a beautiful recurring revenue stream. Investors can expect the 1.2% yield to grow over time, and I believe the stock will continue its market-beating ways for years to come.
The Foolishly Freddie bottom line
Of course, these aren't the only stocks that should benefit from rising mortgage rates. But they are two quality companies that are ideal for long-term, Foolish investors looking to become part-owners of businesses that have and will continue to stand the test of time. Make sure to add them to your watchlist today.
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The article 2 Stocks Set to Win From Rising Mortgage Rates originally appeared on Fool.com.Jason Moser owns shares of Starbucks. The Motley Fool recommends Home Depot, Lowe's, and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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