Homebuilder stocks rebound in the wake of falling interest rates

A “Sold” sign is displayed outside a house under construction at a Lennar Corp development. in Montgomery, Illinois.

Daniel Acker | Bloomberg | Getty Images

As the broader markets rallied to start the New Year on Monday, the residential construction sector sold off. IShares US Home Construction ETF lost 2.69% on Monday, its worst day since September 30e when it fell 2.89%.

The decline was largely due to a surge in the 10-year US Treasury yield, which mortgage rates are loosely tracking. Investors appeared to rule out the omicron variant and, as a result, withdraw from the relative safety of the bond market. This made the automakers the outliers of the stock rally.

But builders’ shares rebounded on Tuesday, with investors still betting on housing demand despite declining affordability. The homebuilders ETF rose just under 1% at midday.

Some of the larger stocks in the industry posted larger gains. PulteGroup rose 1.5% at midday while shares of Toll Brothers jumped 1.6%.

“We’re still in the camp that thinks affordability is in fact NOT stretched yet (at least by historical standards) – and we’re seeing bigger house price gains coming in 2022,” Buck said. Horne, analyst at Raymond James.

Horne admits that “there are a good number of investors we speak with who are still fearful of the group due to affordability issues. Large rate swings like the ones we saw on Monday have likely amplified these fears “.

Home builders have been the darlings of the pandemic, as demand for housing suddenly skyrockets. ITB gained 48.6% in 2021, its third consecutive positive year and its best year since 2017.

Home prices rose 18.1% year over year in November, according to a new reading from CoreLogic. This is in fact a slight increase in the annual gain compared to October (18.0%). Some markets, such as Phoenix, Las Vegas and San Diego are recording successful annual gains of 30.5%, 24.1% and 21.8% respectively.

“Over the past year, we’ve seen one of the strongest seller markets in a generation,” said Frank Martell, President and CEO of CoreLogic. “While rising interest rates may help slow home buying activity, we expect 2022 to be another strong year with continued upward price growth.”

Pending home sales, as measured by signed contracts, edged down in November, but realtors blamed low supply more than high prices, according to the National Association of Realtors.

“While I don’t expect either a reduction in prices, or another year of price gains at a record pace, the market will see more inventory in 2022 and this will help some consumers to be affordable,” Lawrence said. Yun, chief economist of the NAR.

Median-priced single-family homes were less affordable at the end of 2021 compared to historical averages in just over three-quarters of the country, according to a report from ATTOM, a real estate data and analysis company. This is just 39% of counties nationwide that were historically less affordable in the fourth quarter of 2020, and the highest level in 13 years.

While most analysts say the housing market remains affordable overall, given wage growth and the recent increase in the savings rate, the amount of income spent on housing is growing rapidly. At some point, lenders will be less likely to offer loans to certain borrowers if the debt-to-income ratio becomes too risky.

“The average wage earner can still afford a typical home across the United States, but the financial comfort zone continues to shrink as home prices continue to soar and mortgage rates rise,” Todd said. Teta, Product Manager at ATTOM.

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