D.R. Horton, Inc. (DHI), NVR, Inc. (NVR): Is The Housing Market Actually Improving?

FOMC decided at the end of last year to launch its third quantitative easing plan that consist of purchasing $40 billion a month of mortgage backed securities and $45 billion of long term treasuries securities. Moreover, in the recent FOMC meeting, which was held at the end of January, the FOMC didn’t specify a clear time-frame as to when will this asset purchase program end. The FOMC’s intervention in the mortgage market brings into mind Goodhart’s law. This law suggests that once policymakers intervene in a certain market – in our case the housing market – then the changes in it, as indicated by economic reports, become unreliable to assess the progress of this market. In other words, once the government meddles in a certain market, the signs of its recovery don’t necessarily mean this market is improving. This apparent improvement might be superficial and once the intervention will stop the situation might deteriorate again. So just because the housing market is improving could be partly due to the FOMC’s intervention. The Fed’s purchase program raises the demand for mortgage backed securities and lowers the risk attributed to them.

The sharp rise in stocks of leading homebuilders, the spike in revenues and the reports that show the U.S housing market is improving, should be taken with a grain of salt. The FOMC’s market intervention might keep cutting the mortgage rates, but this might turn out to be a short term solution that once it will end could deteriorate the housing market.

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The article Is The Housing Market Actually Improving? originally appeared on Fool.com and is written by Lior Cohen.

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