Home Builders May Be Affected By Fiscal Cliff

The home-builder stocks have been one of the best performing stock sectors over the past year. This industry group really emerged as a market leading sector October 4, 2011 when the major stock indexes put in a significant low. Since that time, leading home-builder stocks such as Toll Brothers Inc (TOL), and Lennar Corp. (LEN) have increased by more than 100.0%. This sector has also provided an increase in construction jobs which has helped this economy over the past year. Should the home-builder sector start to decline in 2013 it could be signaling some serious problems for the U.S. economy.

One of the primary drivers for the home-builder sector has been the artificially low interest rates that are being created by the Federal Reserve. The central bank has been buying $40 billion worth of mortgage backed securities (MBS) a month since it announced it's latest QE-3 program. Earlier today, a report was released that stated home buyers are coming back as contracts for October increased by 5.2% from a month earlier. This is once again being aided by low interest rates. The 30-year fixed mortgage is now at 3.40%, which is an all time low.

The Mortgage Tax Credit (Third Rail?)
Now everyone knows that the fiscal cliff in the United States is looming. Many politicians have announced that they would like to cut the mortgage interest tax credit. If that tax credit were to end it could once again cause home prices to decline. Many first-time home buyers depend on that tax credit as a major incentive to invest in a home. We shall see what the politicians do when it comes to this important tax credit. A strong case can be made that the housing sector must be revived if the United States is to have any sustainable recovery, manufacturing is certainly not going to do it.

Today, most leading home-builder stocks are trading higher on the day. Leading home-builder equities such as DR Horton Inc, KB Home (KBH), and Beazer Homes USA Inc. (BZH) are all trading higher on the session. The near-term problem with the home-builder stocks is that they are now all trading below the important and psychological 50-day moving average. Until this moving average is recaptured with conviction on the charts the sector looks vulnerable for a correction over the next couple of months.