No one is happier with the Fed in limbo than home builders

No one is happier with the Fed in limbo - and 10Y Treasury yields back at 2.05% - than home builders. The NAHB index of builder sentiment is now up to 64, its highest since October 2005, three months after the peak of the housing bubble. Does that mean housing is headed over the cliff again? Probably not. 

The cycle is more like a 4-stroke engine than a 2-stroke one and today's strong sentiment more reflects the long, cool fuel intake phase than the leveraged compression phase that ultimately ends with a bang. If you don't know your 2-strokes from 4, don't worry - builders are happy because they're enjoying a long stable recovery that, while not fast, seems sustainable for that very reason. Permits may have slipped 5% between September and August but the 4% growth trend remains very much intact and given they are still running 60% below 2005 levels, there still seems to be lots of room for expansion / catch-up.

The trouble is, interest rates are a two-edged sword. Fifteen-year mortgage rates are currently at 2.86%, just about their lowest of the crisis, save for a brief couple of months in mid-2013. If the Fed ever does get around to hiking rates, mortgage rates will go with them. No one knows how sensitive housing will be to that move but no one should the direction of the impact. Housing is surely the key risk the Fed has to watch out for when normalization finally begins.