Why Homebuilder Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Homebuilder shares tanked today as companies including Pulte Group (NYSE: PHM  ) , DR Horton (NYSE: DHI  ) , and Ryland Group (NYSE: RYL  ) were all down by more than 10% at one point as investors bet that the change in Fed policy could kill the housing rally.

So what: Yesterday, Fed Chairman Ben Bernake said that the central bank should begin tapering its $85 billion monthly stimulus program by the end of the year, and planned to end it by the middle of next year. The announcement has already sent up treasury rates 10%, which will lead to higher mortgage rates, putting additional pressure on the housing market. Homebuilder stocks had been on a tear this year, as housing data has hit highs not seen since before the bubble burst.

Now what: The overall reaction to the Fed announcement seems exaggerated, as stocks have already dropped 4% since the news came out. While higher mortgage rates could cool the housing market, the improving economy could also encourage more housing starts. Monetary policy is just one of several factors driving the economy, and needs to be viewed in that light. Still, if interest rates continue to increase, look for these stocks to fall even more.

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