The clouds may be parting and at sliver of light is starting to cut through the darkened horizon of the housing market. It may be the first sign of a potential awakening of potential home buyers.
I’m fond of saying, it’s always darkest before the dawn. So, I’m saying it again. This is especially important after this morning’s better than expected CPI and the bullish response in the bond market and the homebuilder stocks.
From a contrarian standpoint, the market was ripe for good news. Prior to the CPI release the housing market was resembling the proverbial deer in the headlights as buyers and sellers seemed paralyzed by the current status quo of interest rates and the uncertainty about when the Federal Reserve will eventually cut rates.
Mr. Powell’s congressional testimony this week was seen as encouraging by both the bond and stock market, when he noted that “good data” could be followed by interest rate cuts. The big questions are what is “good data,” and whether the market’s suddenly rosy view will extend to the real economy.
I expect we’re about to find out as the better than expected CPI report, has pushed U.S. Treasury bond yields decidedly lower, which will likely translate into lower mortgage rates within the next few days. For clues as to what’s next, watch the homebuilder stocks.
So far, so good.
Before the bullish turn of events, the doom and gloom on the housing market was getting pretty darned thick. But those investors who have remained patient may be about to be rewarded.
I have just issued a new Sector Selector BUY recommendation on a housing ETF for Buy me a Coffee Members. Access to the Sector Selector is FREE with your membership. In addition, there are plenty of homebuilder stocks to be found at Joe Duarte in the Money Options.com.
The Doom and Gloom Was Nearing Record Levels
Remember, it’s always darkest before the dawn. So, if you think it feels like 2007 in the housing market, you’re not alone.
Wall Street firms are downgrading and reducing price targets on homebuilder companies on a regular basis, while individual company shares hug the bottom of their recent trading range, which I hate to admit, looks brittle. But, there’s more to worry about. According to a recent Redfin report, pending home sales are rapidly falling, mortgage applications are falling, homebuyer demand has stalled, and Google searches for “home for sale” are falling.
In the same report, however, Redfin adds that touring activity – people actually visiting listed homes – is rising. What makes this data more compelling is that it’s fresher than the government statistics, which gives the data an air of timeliness. Moreover, it says that demand is still outstripping supply while the sticking points are interest rates and prices.
Here’s the doom and gloom list:
· Anecdotal reports, backed by video footage on YouTube of fully built out developments sitting empty in Las Vegas and Austin; (it’s o.k. to mute and just watch – the video speaks for itself) have been going viral. Anyone who read “The Big Short” or lived in Florida in 2007 and 2008 can relate to this;
· Houses are sitting on the market for longer and sellers are cutting prices. A townhome in my neighborhood has cut its sale price from 515,000 to $485,000 (multiple, bi-weekly cuts) since listing the house over 100 days prior to this writing. I haven’t seen too many people “touring” through this one, which is only two years old. There are five new townhomes next to it, which have just received a $10,000 price reduction, while one of the five has sold;
· Homebuilders, as stated above, are cutting prices and customizing incentives;
· Housing starts, existing and new home sales falling;
· Mortgage demand, both new loans and refinancings remain tepid at best, remaining flat compared to last month’s data, while falling below last year’s levels: and
· There are no signs of a buyer stampede even as mortgage rates remain below 7% for five straight weeks.
On the other hand, this may all be about to change.
What the Charts are Saying
The doom and gloom is thick, but the clouds are parting. The U.S. Ten Year Note yield (TNX), the benchmark for 30 year mortgages has fallen to its lowest level since April 2024. That will likely move mortgage rates decidedly below 7%.
Mortgage rates have been below 7% for five straight weeks. This morning’s updated data checks in at a 6.89% average. Moreover, the down trend seems to be accelerating.
The iShares U.S. Home Construction ETF (ITB) has reversed its recent downtrend, as I’ve been expecting. Last week, in this space, I noted that as Wall Street was downgrading the homebuilder stocks, smart money was moving into the shares quietly.
Homebuilders aren’t the only winners. As I noted in the same article cited above, the real estate investment trusts as in the iShares U.S. Real Estate ETF (IYR) have been under accumulation for the past few weeks as smart money has been slowly building positions ahead of a potential Federal Reserve rate cut.
Bottom Line
Persistently high interest rates and high prices are keeping buyers from hitting the buy button. Yet, the demand for housing remains higher than current supply. Thus, lower interest rates will likely improve the current status of the market.
The better than expected CPI has moved bond yields nicely lower which means mortgage rates will likely follow.
One final thought: D.R. Horton (DHI) is due to report earnings on 7/16/24. Given Wall Street’s bearish turn of late, and given Horton’s management of its resources and its balance sheet, I would not be surprised to see them beat expectations. The market’s response will be more related to the outlook. And that’s where things should get interesting.
DHI is a core holding in the Rainy Day Portfolio at Joe Duarte in the Money Options.com. Ahead of earnings, I will be adding some timely hedges to the stock, just in case. You can get the whole scoop with a Free 2-Week Trial to the Service here. I own shares in DHI.
Thanks to everyone for your ongoing support. I really appreciate it.
Thanks also to all the current Buy Me a Coffee members and supporters. Special shout out to new members who now have access to the Sector Selector ETF Service, which is included, at no extra charge with your Buy Me a Coffee membership.
For intermediate term trading strategies take a Free 2 week trial to Joe Duarte in the Money Options.com.
For active trading, short term trading strategies, check out the Smart Money Passport.
I also appreciate single coffees, which you can buy me here.