This morning’s average 30-year Mortgage came in at 7.02%. What’s more important, is that given the usual one week adjustment period between bond yields and mortgages, and barring a major reversal in the U.S. Ten Year Note yield (TNX), next week’s mortgage rates could come in below 7%, just ahead of Memorial Day, which is the traditional launch of the summer home buying season, just as homebuilders are slowing construction of new homes.
If mortgage rates drop below 7% and remain there for a few weeks, we may see a surge in home buying activity and homebuilder stocks, just as the number of new homes available tightens up. The combination of tight housing supplies, steady to rising demand due to population shifts combined with a slowdown in building makes for a potential buying frenzy if mortgage rates cooperate.
The real estate sector, both in terms of homebuilder and Real Estate Investment Trusts (REITs) moved decidedly higher after the softer than expected CPI data was released on 5/15/24. The rally has moved several of our Sector Selector ETF picks nicely higher. If you’re not a Sector Selector subscriber, it’s FREE with your Buy me a Coffee membership.
And while it’s great to reap the benefits of having been in the right stock market sectors ahead of the rally, an equally important metric to ponder is whether the drop in the U.S. Ten Year Note yield (TNX) and the accompanying fall in mortgage rates will spur potential home buyers to come off the sidelines.
I would be surprised if it didn’t. I’ve discussed the market timing aspect of homebuying many times, and if history is any guide, we’ll see it again.
Tight Supplies Will Likely Persist Just in Time for a Drop in Rates
Homebuilder stocks moved up in a big way on 5/15/24 after the better than expected CPI numbers triggered a bond buying frenzy pushing bond yields lower. This morning, the sector is giving back some of yesterday’s gains as the market is knee-jerking a worse than expected set of building permits and housing starts number released this morning.
But here's the contrarian view point. I’m sticking to the bullish side for now because fewer starts and permits means that supplies will remain tight and that every surge in buying spurred by periodic declines in interest rates, as we just saw are likely to boost homebuilder sales and profits as they work off inventory.
The fly in the ointment is whether the U.S. economy slips into recession. If that’s the case then the bullish case for homebuilders will be diminished.
The Invesco Dynamic Building and Construction ETF (PKB) is holding steady after a nice rise in response to the post CPI rally in the stock market. Note the aggressive rise in both ADI (short sellers covering positions) and OBV (buyers moving in).
There is excellent support at the 50-day moving average. Our homebuilder holdings in the Sector Selector also did well in the rally. Remember, the Sector Selector ETF Service is Free with your Buy Me a Coffee Membership. If you’re not a member, this is a great opportunity to join.
Watching the 4.5% Yield on the U.S. Ten Year Treasury Note
The post CPI rally pushed the U.S. Ten Year Note yield (TNX) below 4.5%, which now becomes an important resistance point. A retracement above 4.5% would be negative for stocks, as it would signal that bond traders are once again becoming skittish regarding inflation.
For its own part, a further and perhaps rapid drop in TNX could may suggest that bond traders are betting on the odds of a recession rising. A recession would be a big negative for homebuilder and apartment managing REITs. In other words, the best scenario would be that TNX remains below 4.5% but doesn’t drop precipitously. Instead, a slow steady decline in this important market interest rate would be the best of all worlds.
You can see that the average 30-year mortgage is now just above 7% and just slightly below its 50-day moving average. A further drop is in the cards if TNX doesn't reverse aggressively.
Apartment REITs Are in a Sweet Spot
The quiet winners of the current market are the home rental REITs as high housing prices and tight single family home supplies are pushing potential buyers toward rentals, at least in the short term.
A diversified REIT portfolio, such as in the iShares U.S. Real Estate ETF (IYR) can be useful when interest rates drop. On the other hand, because IYR has several commercial real estate (CRE) holdings, it may underperform when interest rates rise. As a result, it’s best to focus on well-managed, low debt, lower risk REITs which specialize in housing, both in single and multifamily housing.
Bottom Line
The summer home buying season is poised to be memorable in 2024. If mortgage rates fall below 7%, the odds favor an increase in panic buying from those who’ve missed lower rates in prior short term interest rate declines over the last few months.
This sets up a potential boost for homebuilder stocks as well as housing related REITs over the next few weeks to months.
I’ve been bullish on this sector for some time and have several long term holdings in the sector at Joe Duarte in the Money Options.com, which you can check out with a Free Two Week Trial.
Thanks to everyone for your ongoing support. I really appreciate it.
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