Patient and Savvy Housing Market Timers Will be Rewarded as Lower Mortgage Rates are Coming

Bullish Setup Emerges in Real Estate and Homebuilder Stocks

The new smart money, the housing sector’s market timers, who’ve patiently waited for a bond market rally, may come out of the woodwork in the next couple of weeks as the odds are rising that mortgage rates may drop below 7%.  When that happens, expect an acceleration of the rally in the homebuilders and housing related REITs. 

Of course, there are always potential wrenches in the system which could throw things off course.  Next week’s inflation data, PPI on Tuesday (5/14/24) and CPI on Wednesday (5/15/24), could certainly derail the bond market’s current rally.

That said, it makes sense to consider where things stand regarding the on the ground housing market and related stock investments.

Data Backs Market Timing Thesis

I’ve documented this market timing phenomenon for the past few months.  You can find the details here.

To summarize: the public, restrained by circumstances – inflation and higher interest rates - has learned to wait for mortgage rates to fall below certain key levels before attempting to buy a home. Over the last few months, the 7% mortgage barrier has been crucial to the activity level in the physical housing market where supplies of homes remain tight compared to the pent up demand, especially in markets located in the southern U.S., to where populations continue to migrate.  Yet, a move below 7% will likely spur new buyers into the mix.

According to data compiled by the National Association of Homebuilders, both new and existing home sales topped out in December 2023, two months after mortgage rates rose to 7.8%, the top for the current cycle.  They rebounded in January, 2024 and have been flat to slightly positive while remaining below 2023 levels, based on data up to March 2024. 

This makes sense since it takes a few weeks for buyers to be approved and for the sales to close, those houses which were purchased in the November 2023 to January 2024 reflect the drop in mortgage rates that occurred from October 2023 to January 2024, when rates bottomed at 6.8%. When rates began to rise, soon thereafter, activity slowed.

Since January, sales have remained flat, reflecting a mixed bag of activity where some buyers in January and February were able to grab rates below 7% while others missed the boat and remained on the waiting list.

Lower Mortgage Rates Are Looming Barring a Negative Surprise

As I write, there are signs that the labor market is slowing, which have prompted bond yields to fall, and which suggest that mortgage rates will follow.  The U.S. Ten Year Note Yield (TNX), the benchmark for the average 30 year mortgage broke below 4.5% on 5/9/24.  That said, if next week’s inflation news comes in stronger than expected, bond yields and mortgage rates are likely to back up.

The recent decline in TNX has already prompted a decline in the average 30-year mortgage rate from last week’s ominous 7.2% to a less daunting, but still unattractive to many potential buyers, 7.1%.  What’s important, though, is that if this reliable pattern remains in place, there is a chance that next week’s average mortgage may be just above or just below 7%.

If that happens, it will likely spur those potential buyers who’ve been waiting on the sidelines to make a move into the market.  Already, I’m seeing builders busily staging newly built homes in my neighborhood as they anticipate an increase in potential buyers. I’ll be watching this development carefully over the next few weeks and offer updates.

A decisive move by TNX below its 50 and 200-day moving averages should spur a drop in mortgage rates, which should trigger a bullish response in the housing related stocks, both homebuilders and housing related REITs.

Homebuilders and Housing REITs are Primed for a Rally

If bond yields continue their bullish decline, stock market investors should be prepared for a rise in housing related stocks. You can see the smart money has been flowing into homebuilders on each dip recently.

The iShares Home Construction ETF (ITB) has found excellent support in the low $100 area, where a nifty Volume by Price (VPB) bar resides, and is now testing the 50-day moving average.  A move above that 50-day line will likely trigger algo traders to move back in and push ITB’s shares higher.

You can see an even more bullish picture developing in the Dow Jones U.S. Residential REITs Index (DJUSRN) which is nearing a breakout.  This is significant as this index is outperforming the Dow Jones REIT Index (DJR), which includes REITs which invest in commercial real estate (CRE).

As I recently wrote, the situation in CRE is completely opposite to what is happening in housing related REITS, which is why it’s important to be selective when investing in REITs.

If you’re a subscriber to Joe Duarte in the Money Options.com, the Smart Money Passport Substack, or the Sector Selector ETF service, you’re already well positioned for this potential development in the housing related sector.    If you’re not a subscriber, this is a great opportunity to come off the sidelines. You can find full details by clicking the above links or at the end of this post.

Bottom Line

The smart money in the physical housing sector, the market timers, should be watching the developments in the U.S. Treasury bond market carefully.  As the U.S. Treasury Bond yield (TNX) flirts with a decisive break below 4.5%, the odds of a meaningful decline in mortgage rates, perhaps below 7% is likely.

For stock investors, this offers an opportunity to trade the potential upside in both homebuilder stocks and housing related REITs.

Next week’s inflation data could certainly derail this bullish setup.

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