Joe Duarte

Extension of Falling Mortgage Rates is Bullish for Homebuilders and Contrarian Investors

Nov 17, 2023

The good news for homebuilders continues but the bad press about the housing sector remains unabated.  That’s a very bullish development for contrarian investors. 

Last week in this space, I suggested that bullish news on inflation, via the consumer (CPI) and producer price (PPI) indexes would likely maintain the positive tone in the bond market and thus extend into positive developments for mortgage rates and homebuilder.

Specifically, I wrote: “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.”

Thankfully, the data was quite encouraging as the rate of growth of inflation seems to have flattened out. That’s not as good as it would be if inflation would actually retreat, but it’s good enough to have spawned a nice retreat in bond yields and mortgage rates.

Encouraging Data Continues

Just as I expected, the decline in the U.S. Ten Year Note yield (TNX), the basis for most 30-year mortgage rates, has increased mortgage activity as buyers who can afford new homes are moving in. Much of the current increase in activity is due to concerns that mortgage rates will bounce back before too long.  Certainly, this is plausible, but is not guaranteed to happen as the economy is starting to slow, especially the job market.

Here is more encouraging data for homebuilders

  • Homebuilder sentiment remains negative. This is bullish from a contrarian standpoint as this much pessimism could be marking a bottom;

  • Housing starts and building permits rose in October; and

  • Mortgage applications have increased over the last few weeks.

Moreover, as I drive around, I am seeing new construction in North Texas pick up again.  I’d like to hear how your area of the country is doing, so please message me here or at [email protected].

Bullish Price Charts

The composite price chart for the U.S. Ten Year Note yield (TNX), mortgage rates (Mortgage) and the S&P Homebuilders Subsector (SPHB) paints a bullish picture.

Note the tight correlation between TNX (middle panel), mortgages (upper panel) and SPHB (lower panel). Once TNX rolled over, mortgages followed and SPHB turned up.  Currently, the homebuilders are due for a consolidation but they have had quite a run.

You can appreciate the rebound in the homebuilders more clearly in the price action for the SPDR S&P Homebuilders ETF (XHB). Note, however, that after the recent bounce XHB is reaching an overbought level near $84 as RSI is nearing 70.  Thus, a consolidation is likely for the sector in the short term.

And while homebuilders have bounced aggressively, the rental sector, as summarized in the shares of the iShares Residential Real Estate Capped ETF (REZ), although off of its bottom, is lagging. That’s due to a stalling of rents and an increase in new apartments being built.  On the other hand, it’s quite likely that the bottom is also in for this area of the housing market as well, especially as long as interest rates remain stable.

Patient, income seeking investors, can buy into rental property real estate investment trusts for dividends.  The current yield for REZ is $2.20 per share (3.31% yield).

Incidentally, I have several open positions in rental property managers and a varied group of homebuilder stocks at Joe Duarte in the Money Options.com which you can access via a Free Trial here.

As usual, thanks to everyone for their support here and at the Buy Me a Coffee Page.  And thank you all for buying my trading books and watching my instructional trading and analysis videos. I really appreciate your support.

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