Is the bull market over for the homebuilders? Ask the Federal Reserve.
The money flows in real estate are changing as money shifts gears from homebuilders into REITs, especially those which favor short term and residential rentals. On the other hand, the contrarian in me continues to watch the on the ground activity in single family housing, both in new and existing homes.
But mortgage rates are below 7% for the fourth straight week as bond yields moved lower after a confusing employment report. This could well spur that, so far elusive summer bump for the homebuilders.
Where are the Market Timers?
I keep waiting for the market timers in the housing market to appear. But so far, they're staying in their old homes.
Supply and demand remain tilted toward homebuilders, although the slight uptick in existing homes for sale is slightly shifting the market’s dynamics. Just this past week, in my routine checks, I noted that some recently built townhomes in my neighborhood dropped their price. A look at the fine print, however, showed that the builder also cut the incentive package, which means that the buyers aren’t likely to get much benefit. Otherwise, I’m not seeing much movement either way, despite mortgage rates remaining just below 7%.
On the other hand, money flows are increasing toward property rental REITs. You can see this in the price chart for the IYR ETF below, and in the two REIT ETFs featured in the Sector Selector, which is Free with membership to Buy Me A Coffee.
The price chart for the iShares U.S. Real Estate ETF (IYR) suggests that a breakout is imminent in this sector. There are two reasons: the high price of owning a home is keeping potential buyers on the sidelines; and the increase supply of new apartments and single family rental units is working in favor of the rental companies.
That’s purely because of budgeting. For example, if a family has $2500 budgeted per month for housing, and a mortgage would cost $3500 per month, in the short term, it makes sense to rent a similar single family home for a lower price.
And that’s exactly what the build to rent (BTR) segment offers. That’s where investors buy newly built single family homes from builders and then offer them for rent. This is increasing in the Southern U.S. where new arrivals are having trouble finding suitable homes for sale, and instead choose to rent.
Are Homebuilders Done For? Or is a Short Squeeze Around the Corner?
Wall Street is backing off from the homebuilder sectors with several brokerage houses recently downgrading both D.R. Horton (DHI) and Lennar (LEN). The fall in the two stocks is reflected in the price action for the iShares Home Construction ETF (ITB).
If you focus on price alone, homebuilders may be done for. ITB is now testing the support of its 200-day moving average after falling below the 50-day line. But a closer look suggests that some investors have not given up. Indeed, both ADI and OBV diverging as short sellers (ADI) as short sellers are getting a bit more aggressive in trying to bring the price lower, while buyers (OBV) are dipping into the shares.
As I describe in this video, this configuration of ADI and OBV is often the prelude to a short squeeze. This is especially important as assets become oversold. Thus, the RSI indicator for ITB is increasingly important as, it is closing in on the 30 area, signaling the ETF is increasingly oversold. That means that a major decision point is coming for the homebuilders. If ITB can hold above the 200-day line, buyers are likely to return.
It’s All About Interest Rates
So, what would make buyers return to the homebuilders? Interest rates, interest rates, interest rates.
The U.S. Ten Year Note yield (TNX) is once again below its 200-day moving average as the rising unemployment rate overshadowed a stronger than expected rise in non-farm payrolls. Interestingly, however, even though the headline number was more than forecasted, the bond market seems to be paying equal attention to non-government numbers now. This week private payrolls (ADP) and ISM data suggested the labor market is slowing.
And now we’re getting to it. Mortgage rates rose this week but remained below 7%. That’s the fourth consecutive week. Moreover, if TNX remains tame by the time the mortgage figures are released next week, rates will be below 7% for five straight weeks. That's starting to look like a trend.
Bottom Line
Supply and demand remain favorable to homebuilders, but newly built single and multifamily units are now competing more actively with newly built homes. The slowing economy is not helping the homebuilders as prices and incentives are changing.
On the other hand, it’s unlikely that new home inventories, both in the rental and purchasing side are going to be rising much beyond what’s already available. Thus, when the market soaks up the new offerings, we’ll be right back into the tight supply scenario.
Meanwhile, mortgage rates below 7% may be a thing now, which may bring those home buyers who can afford a new home in from the sidelines.
So, what’s the bottom line? When the Federal Reserve eventually lowers rates, we are likely to see another surge in interest from home buyers.
Until then, investors have two choices. Stick with the REITs while they lead the way, and either hold on to homebuilders for the long term if they don’t drop much further from current prices.
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.
If you have any questions or comments about Buy me a Coffee or Substack, you can contact me through Buy me a Coffee or through this e-mail: [email protected].
I own shares in DHI and LEN.