The Federal Reserve has raised rates 11 times since March 2022. As a result, the average home mortgage interest rate has doubled. The cost of financing the "American Dream" has skyrocketed from just shy of 4.4% in February of last year to nearly 7%. The 1%/10% rule says that when interest rates go up 1%, your buying power goes down by 10%. That means buyers can't afford as much house. I'll explain... If you could afford a $500,000 house last year, a 1% rise in interest rates means that you can afford a $450,000 house this year. A 2% rise in interest rates means you can afford only a $400,000 home this year. That's a big part of why rising interest rates are bad for homebuilders. So why in the world did Marc recently recommend a homebuilder stock to his Oxford Income Letter subscribers? Since the Fed started raising rates on March 16, 2022, the housing industry, as represented by the SPDR S&P Homebuilders ETF (NYSE: XHB), has outperformed the market. As you can see in the chart, the SPDR S&P Homebuilders ETF is up 21.57% since the day of the first hike while the S&P 500 is up just 7.15%. (Both returns include dividends.) In other words, the SPDR S&P Homebuilders ETF has outperformed the S&P 500 by more than 14 percentage points. That's a big beat, especially during a pretty volatile period for the markets. |
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