Home builder stocks are experiencing their most successful week since late last year as U.S. Treasury yields decline. This drop in yields could potentially lead to a decrease in mortgage rates, making these stocks even more appealing to investors.
ETFs on the Rise
The SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), which both track the home builders and related industries, had significant gains on Thursday. XHB closed up 2.17%, while ITB closed up 3.42%. According to Dow Jones Market Data, these were the highest closes for both ETFs since October 11. Furthermore, they are on track to be their best performing weeks since November of last year, with gains of approximately 8.1% and 9.6%, respectively.
Rebounding from a Slump
Home builders have been struggling due to the impact of higher mortgage rates in the latter half of the year. Buyers, sellers, and builders alike have felt the weight of these rates. However, there is hope on the horizon as mortgage rates, as measured by Freddie Mac, recently experienced a slight decline after seven consecutive weeks of increase, reaching their highest level in 23 years.
Influence of Treasury Yields
The decline in mortgage rates coincided with a drop in the 10-year Treasury yield. These yields often influence mortgage rates. This decline in yields has significantly contributed to investor enthusiasm, as recorded by Mortgage News Daily. On Thursday, the daily mortgage rate fell to 7.51% from 7.69% on Wednesday and 7.88% on Tuesday.
Overall, the combination of lower Treasury yields and the potential for decreased mortgage rates has caused a surge in home builder stocks. Investors have taken notice and are capitalizing on this opportunity for significant gains in the market.
The Promising Housing Market: Good News for Builders
In the current housing market, characterized by high costs and limited availability, lower mortgage rates bring a glimmer of hope for builders. While sales of existing homes face challenges due to the scarcity of options, the demand for new homes stays strong. Potential buyers, in need of more choices, might turn to builders who can also provide rare incentives like mortgage rate buydowns.
According to Seaport analyst Kenneth Zener, this presents an opportunity as builder stocks are relatively inexpensive. Zener recently upgraded five midsize home builders, including KB Home (Ticker: KBH), M.D.C. Holdings (MDC), Meritage Homes (MTH), Taylor Morrison Home (TMHC), and Toll Brothers (TOL), giving them Buy ratings instead of Hold ratings. It’s worth noting that this upgrade applies to all builders within Zener’s coverage.
Zener emphasizes that many builders are currently trading at around one times book value, traditionally a compelling indicator to consider buying. He explains, “Buying builders at 1x book and selling at 2x has been the long-standing playbook for generalist portfolio managers and should not be dismissed. Unless substantial impairments are looming, which we do not foresee, book value heuristics take precedence over more intricate arguments for higher valuation multiples based on returns on capital, cash flow-to-EPS alignment, or reduced leverage.”
In conclusion, the housing market’s struggles have created an advantageous situation for builders. With new home sales thriving and affordable incentives offered, now could be an opportune time for investors to explore this sector.
