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Why the Dow's Housing Bounce Is Dangerous

Dan Caplinger
June 27, 2013

The Dow Jones Industrials (INDEX: ^DJI) have continued their string of recent gains this morning, up more than 150 points as of 10:55 a.m. EDT. Much of the enthusiasm among investors came from some promising economic reports, including weekly jobless-claim numbers that fell by 9,000 to 346,000, as well as a 0.5% gain in personal income that beat out a 0.3% jump in personal spending. In addition, strength on the housing front continued to bolster the economy, with the National Association of Realtors reporting that pending home sales jumped to six-and-a-half-year highs after a 6.7% increase in May.

Clearly, the financial health of consumers in general is of paramount importance to stocks throughout the economy, as consumer spending drives the majority of economic activity and can therefore make or break an economic recovery. But as for the housing-specific data, investors should be cautious before reading too much into this month's favorable data.

The specific danger to the housing market's recovery comes from mortgage rates, which have surged in the past two months by more than a full percentage point. The NAR noted in its report that in the short run, higher mortgage rates might have prompted greater numbers of contract signings as buyers rushed to take advantage of previously locked-in rates or sought to get financing before rates could rise even further. Big banks JPMorgan Chase