The U.S. Ten Year Note yield (TNX) is struggling to rise above 4.1-4.2%. The longer this trading pattern continues the higher the odds of a reversal. Such a development could spur a short to intermediate term burst in home purchasing activity.
The homebuilder sector continues to hold up despite the recent spike in interest rates. The resilience in the group is highly suggestive that for now the fundamentals of the housing sector remain in favor of the homebuilders. In plain English, the housing shortage is structural, is not likely to be resolved any time soon, and the supply and demand balance favors homebuilders.
Does that mean that the homebuilder stocks will double in the next few months? I suppose anything is possible, and as a holder of several homebuilder company shares, I would welcome that. But realistically speaking, the odds favor steady gains coupled with some earnings related volatility. For example, group leader D.R. Horton (DHI) is due to report on 10/29 while its peer Lennar (LEN) isn’t due to report until 12/12/24. In addition, I’m highly interested in the upcoming earnings from Green Brick Partners (GRBK). That’s because Green Brick builds exclusively in Texas, Georgia, North Carolina, and Florida. Given the recent hurricane related problems in three of these geographical regions, Green Brick’s report will be worth parsing. Disclosure: I own shares in DHI, LEN, and GRBK. All three stocks are core holdings of the Joe Duarte in the Money Options.com Rainy Day Portfolio.
I’ll be paying special attention to the earnings calls. But specifically Green Brick’s and management’s answers to queries about the damage to subdivisions under construction or partially filled, supply chain problems, and the status of material and labor costs.
The stock continues along its bullish path with a potential breakout likely to occur if the U.S. Ten Year Note yield rolls over and breaks below 4%.
What Happens if Bond Yields and Mortgage Rates Head Lower Again?
Last week, I suggested that mortgage rates had bottomed. For now, I’m sticking with that conclusion on an intermediate term basis. On the other hand, given the potential for a reversal in bond yields, we may get a short term reversal before the year is out. This potential reversal in yields is highly influenced by market technicals. Specifically, the rebound in rates exceeded the normal distribution by rising too far, too rapidly.
You can see that in the price chart for the U.S. Ten Year Note yield (TNX, see next section), which rose from 3.6 to 4.1% in a month. In the process, TNX rose above its upper Bollinger Band (green band above and below trading range). When prices (or yields) rise above the upper band, they usually reverse course, and eventually move sideways or fall, usually to the 20-day moving average before making a further decision as to the trend. In addition, the RSI rose to 70 simultaneously, confirming an overbought situation.
Thus, we shouldn’t be surprised with the reversal in yields, although a test of the 200-day moving average and the 4.2% area is not out of the realm of possibilities. What’s more important is whether TNX falls to the 20, 50 day moving averages or breaks below this key support band near 3.8-3.9%.
Even more important is what potential homebuyers do if yields continue to fall and mortgage rates follow. Will we see another feeding frenzy in refinancings? And if so, will it be accompanied by increased activity in new home sales?
Mortgage Rates Have Likely Bottomed but the Bottom Could Well Be Re-Tested.
The rise in bond yields is nearing a potential reversal. The consequences may be bullish in the short to intermediate term for all stocks, especially homebuilders and REITs.
The U.S. Ten Year Note yield (TNX) may be topping out in the short term, but is likely to remain above 4% in response to the September payrolls data, the steady and structural feel of CPI, and the uncertainty of whether the hurricanes will lead to a slowing of the regional economy in the Southeast U.S. or a supply chain related boost in inflation.
TNX has been treading near its upper Bollinger Band, which means that a move back toward the 20-day moving average may develop. On the other hand, a sideways consolidation pattern straddling 4% is also possible.
Until proven otherwise, that means that mortgage rates have hit at least an intermediate term bottom. Yet, a reversal in TNX would lead to a reversal in mortgage rates which could fuel a pickup in sales.
Review: The Current Status of the Housing Market
Here is where things currently stand:
· The current housing shortage is structural. It is likely to remain in place for years;
· Supply and demand remain in favor of homebuilders and attractively located rental properties with lots of perks;
· Mortgage rates may stage a short to intermediate term reversal if bond yields roll over;
· Consumers trying to decide whether to buy or rent are mostly influenced by the monthly payment they will have to deliver either as a mortgage or rental payment;
· New homes seem to be more attractive for buyers than existing homes; and
· Homebuilders should remain profitable but their margins are starting to shrink.
Over the next few weeks we should learn more about the effect of the hurricane strikes in the Southeast U.S. where populations had been growing be on the housing market over the next few months and perhaps longer.
On the Ground – Stark Differences Based on Price Points
Construction is picking up steam in upscale communities suggesting that wealthier potential homebuyers seized on the recent drop in interest rates.
Last week, I noted a bit more action in an undeveloped subdivision owned by a small builder I’ve been keeping an eye on is now sporting a “new construction” sign from a realtor, which means that they are starting to take new orders. I saw a surveyor truck there on a recent drive-by. As of now, there is no sign of construction.
On the other hand, a gated community by a lake that I also watch has sprouted several new large builds which are moving rapidly. At this point, the framing is done and they are applying insulation. The new builds have almost popped up overnight.
Renters have been moving into single family homes more actively, but selectively. Fewer U-Haul trucks are driving around currently. But that’s not uncommon in the middle of the month. I expect they will once again pick up as the new month arrives.
There are several apartment complexes which are on the verge of completion in my area. Some just hung up “Now Leasing” signs. I’m starting to see cars line up by the leasing office.
Homebuilders and REITs – Big Moves are Setting Up.
The iShares U.S. Home Construction ETF (ITB) is testing the top of its trading range. Lower bond yields should help push this ETF higher.
The iShares U.S. Real Estate ETF (IYR) is becoming highly interest rate dependent. Much of what happens here will depend on how the action in TNX.
Bottom Line
Supply and demand remain in favor of homebuilders. A short to intermediate term drop in bond yields should lead to lower mortgage rates. Potential home buyers may be moved off the sideline if such a development occurs.
The trend in both homebuilder stocks and REITs are highly dependent on whether bond yields rise or fall.
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