The U.S. Ten Year Note yield (TNX) is headed for a major test as it nears the 4% area. The repercussions of a move below that important yield point are widespread throughout the financial markets. Of course, the real estate sectors, both commercial and residential will be impacted. In this article, I will summarize the key points to consider.
Way back in September, 2023, in this space I noted that bond yields were trading in an abnormal trading pattern and that at some point, perhaps in the not too distant future a reversal was very likely. I also noted that when that reversal developed, a historic buying opportunity for homebuilder stocks was likely.
As it turns out, a month after I wrote that article, the U.S. Ten Year Note yield (TNX) topped 5% and almost immediately reversed. As I write today (12/6/23), TNX had fallen to as low as 4.1%. Moreover, the homebuilder stocks, as measured by the action in the SPDR S&P Homebuilder ETF (XHB) are up nearly 30% over the same period.
This rally in the homebuilders is not by accident. As the chart for the 30-year Mortgage average shows, mortgage rates have dropped nearly a full point since they topped out near 8% in late September.
Meanwhile, the real estate investment trusts, as in the Vanguard Real Estate ETF (VNQ) are up nearly 18% over the same period.
All of which brings us to what may be next.
Current Data Points to Resurgence in Housing
As mortgage rates have dropped so has mortgage activity risen. The latest mortgage data is certainly encouraging with weekly mortgage apps for refinancing rising by 14% while home purchasing apps were down slightly (0.3% week over week) and still down 17% year over year. But that suggests that mortgage demand for new homes may have bottomed.
If that’s true, then a move below 7% for the average mortgage is likely to trigger more buyers to come into the market, especially if existing home inventory increases.
On the homebuilder front, the most recent earnings beat and upgraded future guidance from Toll Brothers (TOL), was quite encouraging, as the company cited the recent drop in mortgage rates as a likely booster of future activity.
Supply, Demand, and Location
The key to success in real estate is two-fold. First, of course is location. If an asset is in a prime location, it will attract more customers. But equally important is supply. Low supply means that when conditions improve, the odds will favor higher prices. When the two are combined into the same package, then the odds of profits rise.
As a result, the most profitable stocks in the homebuilder market are those of companies, which are concentrating their efforts in the areas of the U.S. which are attractive to homebuyers. Over the last few years, those homebuilders, and home rental companies which have focused on suburban areas, especially in the sunbelt, have done the best.
I have seven homebuilder sector and three real estate investment trust stocks which meet those criteria at Joe Duarte in the Money Options.com. You can check them out with a Two-Week Free Trial here. I own shares in TOL.
Bottom Line
If interest rates break below the 4% yield area on the U.S. Ten Year note, the market’s reaction will be worth watching. If there is no acceleration in the stocks in the sector, it is possible we may have seen a top in the market.
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