The housing market took a direct hit when consumer prices came in hotter than expected earlier this week and bond yields moved above key yields. Yet, in a sign of resiliency, buoyed by what seems to be a concerted effort from the dip buying crowd, the homebuilder sector failed to break down completely.
As I’ve been writing recently, the key yield on the U.S. Ten Year Note (TNX), the benchmark rate for most 30-year mortgages was 4.4%. Unfortunately, the nasty CPI surprise pushed TNX well above that. The key bond yield is now trading above 4.5%, and could move higher, although in the short term it is overextended.
You can see that TNX is now well above its 50 and 200-day moving averages, signaling a full long term reversal to an uptrend. In fact, the current yield trend suggests that TNX may test the 4.7% yield before investors make what could be a final decision about the long term trajectory of this important rate.
My concern is that a move above 4.7% could take TNX back to a test of the 5% area. If this were to happen, it would be devastating for the entire stock market, especially the homebuilder and REIT sectors.
Already, the weekly mortgage chart shows that as TNX has risen, so has the average 30-year mortgage. What this chart does not show is that many loans are already above 7%. According to Housingwire.com, as of this morning (4/12/24), the average 30-year mortgage was at 7.20%.
The homebuilder stocks, as in the SPDR S&P Homebuilder ETF cracked under the pressure of rising rates after the CPI surprise. On the other hand, XHB is still testing the support of its 50-day moving average, which is encouraging. If XHB can hold above this key support level, and interest rates stabilize, we may see a return to the top of the recent trading range. If for some reason, the Fed decides to lower rates in the next three months, we are likely to see a move higher in the sector.
The real estate investment trusts (IYR), did not dodge the rise in TNX. The iShares U.S. Real Estate ETF (IYR) broke below its 50-day moving average but held above its 200-day line.
Bottom Line
In the housing market it’s all about the balance between interest rates and supply and demand. With interest rates moving higher, half of the reason to buy a house or move to a more expensive rental space is gone.
On the other hand, the supply of homes available for purchase remains tight, which favors homebuilders over existing home owners. When it comes to rentals, each market is different now due to the supply of newly built apartments.
Inside CPI, however, rents seem to be rising, which goes against some of the reports that are suggesting rents have topped out.
The bottom line, no matter how you slice it, though, is that in the current market, interest rates are overriding supply. Thus, even if homebuilders hold at current support, buying this dip will require timing and precision.
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