Can Housing Rescue the Dow?

The stock market gave bullish investors some respite today as favorable economic data helped to bring some more positive perspective to the troubling events of the past week. As freaked out as investors were by the Federal Reserve's hints about a potential end to quantitative easing, it's important to remember that accelerating economic growth should help stocks by improving their fundamental earnings and growth prospects. Investors seemed to remember some of that today, as the Dow Jones Industrials (DJINDICES: ^DJI  ) were up by about 115 points as of 10:55 a.m. EDT.

One piece of favorable news came from the housing market, with the S&P Case-Shiller index of home prices showing a 2.5% monthly rise in April. Combine that with favorable readings over the past several months, and you get a year-over-year increase of more than 12%. Several formerly hard-hit areas, including Las Vegas and Phoenix, posted gains of more than 20%, with high-growth areas San Francisco and Atlanta seeing similar increases. For the month, only Detroit failed to post a price rise compared to March levels.

But stock investors need to keep one important thing in mind with regard to this housing data: The market has already anticipated good news. Within the Dow, Home Depot (NYSE: HD  ) clearly owes much of its gains over the past year to improving prospects for housing, and its gain of more than 1% today has pushed it closer to regaining the all-time highs it set recently. But investors are assuming that the company can grow earnings at a 15% to 20% clip this year and next, and to achieve that, Home Depot will need continued housing-market strength.

Similarly, homebuilder Lennar (NYSE: LEN  ) has gained more than 3% today after announcing favorable earnings and upbeat guidance, as it sees high demand outpacing supply in the housing market. But Lennar's stock has already tripled from its lows in late 2011, leaving less room for further price appreciation.

Finally, housing will have to deal with the headwinds of higher mortgage rates. Already, banks JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) have declined from their recent highs as refinancing activity slows in the face of less attractive mortgage terms. Part of the spike in home-buying activity owes to buyers rushing to lock in relatively low rates before they rise, but unless mortgage rates suddenly reverse course and head substantially lower, Citigroup and JPMorgan will likely see eventual slowing in overall mortgage-loan applications. Given the extent to which they and other banks have relied on transaction-based mortgage income lately, higher rates are bad news for bullish bank investors.

Putting a roof over the market
Housing undeniably plays a key role in the U.S. economy, but it won't rescue the Dow from its current correction by itself. Economic growth will need to come from many sources in order to provide the impetus for the stock market to stand on its own, especially given diminishing assistance from the Fed and other central banks for the foreseeable future.

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