The homebuilder stocks are in full recovery mode. And that’s no accident as mortgage rates have fallen a full 50 basis points since topping out at eight percent a few weeks ago. On the other hand, a lot can happen over the next few days as the October releases for Consumer (CPI) and Producer (PPI) prices may show an uptick in inflation which could derail the emerging bullish picture.
Bullish Tidings Continue
This week has delivered a major move up in shares of homebuilders. Things got started with a bullish earnings report from D.R. Horton (DHI), and as often happens, the good news spilled onto the rest of the sector.
The price chart for DHI illustrates the generally bullish vibe in the sector. Moreover, as I discussed in an in depth review of the homebuilders, here, there is a rapidly growing area of the housing market which could be worth billions, the built to rent sector (BTR). As I point out in the article, Horton received $1 billion in revenues in its most recent quarter from BTR alone.
As you can see by the price chart for the Average 30-Year Mortgage rate (MORTGAGE) and the underlying panels, the interest rate picture for homebuilders is improving. Consider the following:
Mortgage rates have fallen to 7.5% from their recent highs;
In addition, the rates are now back inside normal trading parameters as they are inside the upper Bollinger Band (green line);
The U.S. Ten Year Note yield (TNX) is also well off its recent highs which is why mortgage rates have dropped; and
The S&P Homebuilder Subindustry Index (SPHB) has subsequently moved higher.
What’s Next?
If there is no interruption in the downtrend for TNX and subsequently mortgage rates we can expect the 30-year rate to move toward 7.2% over the next few weeks. That would translate into what could be a big jump in the number of home buyers coming off the sidelines and a boost to the homebuilder stocks.
Next week's releases of both consumer and producer prices could certainly deliver bad news. Thus, some caution is warranted. But so far, so good.
As I’ve noted here multiple times, I’ve been bullish on homebuilder stocks for several months and have recommended six companies in the sector to subscribers of Joe Duarte in the Money Options.com. If you want a look, book a Two-Week Free Trial to the service here.
I own shares in DHI, which is currently also part of the Joe Duarte in the Money Options.com Rainy Day Portfolio.
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