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Homebuilders Rise Most Since July After Taper Refrained

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Sept. 18 (Bloomberg) -- Homebuilder shares jumped the most in two months after the Federal Reserve unexpectedly said it plans to continue $85 billion of monthly bond purchases to keep interest rates low.

The 11-member Standard & Poor’s Supercomposite Homebuilding Index gained 6 percent at the close, the biggest increase since July 11. The index, which includes Lennar Corp., PulteGroup Inc. and D.R. Horton Inc., rose to the highest level since July 23.

The Fed’s decision “is hugely positive in the near to intermediate term,” Stephen East, a homebuilder analyst with International Strategy & Investment Group LLC in St. Charles, Missouri, said in a note today. He predicted the move will lead to lower mortgage rates. “That drop will have a quick, positive impact on home sales -- particularly at the entry level. If rates drop, those moping potential buyers are suddenly given a second chance at a home.”

Shares of homebuilders fell 29 percent from May 14 to Sept. 5 after rates for 30-year mortgages surged by a more than a percentage point from near record lows of 3.35 percent in early May. The S&P builder index is up almost 18 percent since Sept. 5.

Ryland Group Inc., based in Westlake Village, California, was today’s biggest gainer, climbing 8.7 percent, followed by Los Angeles-based KB Home, which rose 8.2 percent. Both builders cater to first-time buyers.

“Today’s actions show that the Fed is cognizant that increasing rates could potentially derail the housing recovery, which is a key driver of economic growth,” said Robert Wetenhall, an analyst at RBC Capital Markets LLC in New York. “There’s no question that higher interest rates negatively affect buyers at the lower end of the market.”

Yields Drop

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates dropped to the lowest level in more than a month. Rates on 30-year fixed-rate mortgages averaged 4.57 percent last week, according to McLean, Virginia-based Freddie Mac.

Builders broke ground on new homes at an annual pace of 891,000 in August, fewer starts than projected, according to a Commerce Department report today.

The Fed wants to see more signs of lasting improvement in the economy before it tapers purchases of bonds, a surprise move for the central bank that sent stocks and Treasuries up.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference today in Washington after a two-day meeting of the Federal Open Market Committee. “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”

Growth Slowdown

Whether or not mortgage rates rise, the housing market needs more robust job growth to flourish, said Megan McGrath, an analyst at MKM Partners LLC in Stamford, Connecticut.

“We’ve seen a preview what happens when rates do go up -- we got a taste of that over the summer,” McGrath said in a telephone interview today. “It was nothing monumental but there was a slowdown in growth. The hope is that the next time they go up, they won’t go up in the absence of job growth, which is what we had over the summer.”

Other real estate stocks also rallied today. The Bloomberg Real Estate Investment Trust Index gained 3.4 percent, the biggest increase since November 2011. Lower interest rates benefit REITs because they reduce the companies’ borrowing costs, making property purchases more affordable.

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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