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Job Shock Hits Mortgage, Home Stocks

By Jonathan Stempel

NEW YORK (Reuters) - The U.S. economy's surprising addition of 308,000 jobs in March might make it more expensive to own a home, industry experts warned on Friday.


That perception prompted a sell-off in shares of mortgage lenders, home builders and home improvement retailers.


Job growth suggests a strengthening economy. But higher interest rates often follow. And the Labor Department (news - web sites)'s report on job growth triggered a sell-off in U.S. Treasuries. The yield on the benchmark 10-year note soared to around 4.15 percent from Thursday's 3.89 percent.


Rising Treasury yields often lead to higher lending rates, which can dampen home demand. This caused shares of mortgage lenders Washington Mutual Inc. (NYSE:WM - news) and Countrywide Financial Corp. (NYSE:CFC - news), builders D.R. Horton Inc. (NYSE:DHI - news) and Pulte Homes Inc. (NYSE:PHM - news), and home improvement retailers Home Depot Inc.(NYSE:HD - news) and Lowe's Cos.(NYSE:LOW - news), among others, to fall.


"(Shares) are down because people expect interest rates to increase," said Eric Fitzwater, senior research analyst at SNL Financial in Charlottesville, Virginia. "This looks like it could be a catalyst to start rates higher."


Though the unemployment rate rose to 5.7 percent, the job gains were triple what economists forecast.


Analysts have forecast that 2004 could be a record year for new home sales. The average 30-year mortgage rate was just 5.52 percent last week, mortgage financier Freddie Mac said. And refinancing demand is high, although it is down 51 percent from its May 2003 peak, the Mortgage Bankers Association said.


Higher borrowing costs might steal some of the thunder.


"The extremely low mortgage rates that we have experienced, and did not expect, this year are probably not going to be sustained," said Michael Carliner, an economist for the National Association of Home Builders in Washington, D.C.


"Greater employment growth is itself a positive (because it puts more money in people's pockets) but it will take a little bit of momentum out of housing demand," he said.


A saving grace for home builders, he said, is they "are still sitting on a large backlog of unfilled orders."


BANKING ON YOUR HOME


Friday's 5 percent drop in Countrywide shares, which have doubled in the last year, was notable given Chief Operating Officer Stanford Kurland's March 9 statement that the company, which also services $669 billion of mortgages, considered itself "well positioned to perform in any rate environment."


Countrywide, Fitzwater said, "always says it is ready for a rise in interest rates and a slowdown in originations. We have to see how that strategy will play out."


Countrywide was not immediately available for comment.


Jeff Auxier, president of Auxier Asset Management LLC in Lake Oswego, Oregon, said rising rates might also hurt existing homes' values. This makes homes less affordable to people who need to borrow, and hurts homeowners, who borrowed against their homes to buy other things.


"People have been using their homes as banks by pulling equity out," said Auxier, who owns Washington Mutual, D.R. Horton and Home Depot shares. "When money is cheap, the asset value is inflated. But when money tightens, that asset value corrects."

Among big mortgage lenders, the shares of Wells Fargo & Co. (NYSE:WFC - news) fell 64 cents, or 1.1 percent, to close at $56.61; Washington Mutual dropped $1.16, or 2.7 percent, to $41.63, and Countrywide shares were down $4.79 at $91.25 at the close.

Home builder shares also took a hit, with D.R. Horton down $1.66, or 4.7 percent, at $33.73; Pulte fell $2.63, or 4.7 percent, to $52.87, and Lennar Corp. (NYSE:LEN - news) declined $1.94, or 3.6 percent, to $52.22.

Home Depot shares fell 40 cents to $36.68 and Lowe's shares fell 91 cents to $54.90.


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