For over a year, the red-hot housing market has been at the mercy of the Federal Reserve's rate hikes, which have driven mortgage rates to sky-high levels. That pressure could soon ease.
Mortgage rates have hovered above 7% since August, according to Freddie Mac data. Homeowners who locked down ultra-low rates during the height of the Covid pandemic have been reluctant to sell, squeezing the supply of houses available for sale. Both those factors have helped create a scorching-hot housing market and a boom in homebuilder stocks, as Americans turned to building as a buying alternative.
The SPDR S&P Homebuilders exchange-traded fund has popped 35% this year, outpacing the benchmark index's 17% gain. Shares of PulteGroup have soared 91%, Toll Brothers has risen 71%, DR Horton has added 43% and Lennar has gained 40%.
This week, the Consumer Price Index and Producer Price Index reports for October both signaled that inflation is continuing to slow, cementing investors' belief that the Federal Reserve is done with its aggressive hiking cycle and will start cutting rates next year.
Stocks and bonds have rallied furiously in response. The 10-year US Treasury yield, which underpins the borrowing cost for everything from student loans to commercial paper to mortgages, slid to 4.45% on Wednesday, well below the 5% level it topped in late October, according to Tradeweb.
Moderating bond yields could change the narrative for the housing market.
Tight supply and elevated mortgage rates this year made home purchases the least affordable they've been since 1984. While some prospective buyers have turned to building, not all have been able to make that pivot, as Americans shell out for everything from groceries to restarting student loan payments and rack up credit card debt.
The likelihood that the climb in interest rates, and in turn mortgage rates, is over bodes well for those who have been priced out of the ultra-competitive housing market, says Steve Sosnick, chief strategist at Interactive Brokers.
"The most expensive thing when you're buying a house is the mortgage, other than the house itself," said Sosnick. "Anything that can make that cheaper is a plus for the housing market."
Homebuilder confidence fell in November for the fourth consecutive month, according to the latest National Association of Home Builders / Wells Fargo Housing Market Index, which takes into account current sales, buyer traffic and a six-month outlook for sales of new construction homes. But most of that information was gathered before this week's inflation data. NAHB forecasts a 5% jump for single-family starts next year.
One possible dark spot in homebuilder stocks' promising future? If mortgage rates do trickle down, that could entice more owners to put their homes on the market, which could lead more people to buy homes rather than build, says John Petrofsky, senior portfolio manager at FBB Capital Partners.
"Whether the pent up demand is bigger than the pent up supply — I think those are both question marks," said Petrofsky.
Comments
Post a Comment