Cheap Mortgages Aren't Helping Housing Market

They might have to bring in Bob Barker to give some of these houses away. Despite near-record lows for interest rates and a glut of houses available for sale, Americans simply are not lining up to purchase new or used homes. According to Freddie Mac (FMCC) average mortgage rates remained below 4 percent for the fourth consecutive week. The current rate, which hovers around 3.98 percent, should be a positive factor in driving the housing market. Frank Nothaft, vice president and chief economist for Freddie Mac, offered this theory: "Mortgage rates eased slightly this week with fixed-rate loans hovering above all-time lows and ARMs reaching a new nadir. The high-degree of home-buyer affordability in recent months translated into a 1.4 percent pickup in existing home sales during October, according to the National Association of Realtors. The NAR also reported that contract cancellations were up in October as well, which restrained sales from achieving a stronger rebound." In other words, there was a small, but noticeable pickup in home sales in October. But is it enough to call it a turnaround? Hardly. There is still a glut of houses for sale, which is pushing prices down. As prices fall, more homeowners find themselves underwater on their mortgage. As the number of underwater mortgages increases, so too do the number of mortgage defaults and foreclosures. As the number of foreclosures increase, the housing glut increases, further lowering prices. This, my friends, is a never-ending spiral of doom. It's also the reality in the housing market. Until someone (looking at you, Cap'n Obama) steps up and does something to keep people in their homes, this death spiral will continue unabated. You could lower the rates to one percent and it isn't going to move the housing needle. Why? People can't get refinanced if they're upside down on their mortgage. That's why today's news that we're near record-lows for interest rates isn't going to do much for housing sales. ACTION ITEMS:

Bullish:
Traders who believe that low interest rates will drive housing up, regardless of the rest of the economy, might want to consider the following trades:

• Toll Brothers TOL: The premium home-building company has taken a hit the last few years, as the economy has dried up some of their potential markets. However, luxury homes might be early rebounders, and Toll could serve as a canary in the coal mine for a housing market on its way up.

• KB Homes KBH: This company offers exposure for those who feel the market will turn around fastest in areas that were hardest hit by the housing drop. KBH operates in, among other places, Arizona, California, and Nevada — three states that got hammered by the housing crisis.

• SPDR DJ International Real Estate ETF RWX: This ETF covers a broader, international approach to housing markets. This ETF seeks to closely match the returns and characteristics of the total return performance of the Dow Jones Global ex-U.S. Select Real Estate Securities Index (the Index), an equity index based upon the global (ex-US) real estate market.

Bearish:
Traders who believe that housing is going to stay slow for the time being, despite the low interest rates, may consider an alternate positions:

• Go short on the SPDR S&P Homebuilders ETF XHB. This investment vehicle is set up to match the S&P Homebuilders Select Industry Index. If housing drops, this ETF should as well, and could be a good short candidate.

• Similarly, you could short the iShares Dow Jones US Home Construction ETF ITB. This ETF seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Home Construction Index.

• You could also short any of the homebuilders listed above, or any REIT that fits your needs.

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