Homebuilders' Bear Market Gives Off Whiff of Emerging Rate Pain
(Bloomberg) -- Stocks have largely taken in stride a Treasury slump that’s pushed 10-year yields to the highest in seven years. One corner of the market is shuddering, though.
Home builders, among the most sensitive to higher borrowing costs, tumbled this week into a bear market for the first time in two years as 10-year rates topped 3.08 percent. The broader S&P 500 Index, meanwhile, headed for its best month since January.
The four-month slide in housing stocks stands in stark contrast with data showing solid demand. Sure, record prices in lumber, a key commodity in residential construction, and California’s decision to mandate solar panels on new homes didn’t help. But the depth of the stock losses hint that rate worries have muddled the equation.
“We know the consensus says that it won’t impact the economy until rates hit 4 percent or more, but if you look at the home building stocks, they’re telling an entirely different story,” Matt Maley, an equity strategist at Miller Tabak & Co., wrote in a note to clients. The slump “should be seen as a leading indicator that tells us that higher rates just might create a headwind for this industry in the second half of the year,” he said.
Housing stocks have been among the leaders in the nine-year bull market as the economy recovered from the global financial crisis that was triggered by a meltdown in subprime mortgages. At its January peak, the S&P Supercomposite Homebuilding Index had surged almost 24 percent a year since 2009, beating the S&P 500 by 4 percentage points.
The housing cycle could be in the “later innings” of a protracted expansion, according to Piper Jaffray analyst Peter Keith. While home-price appreciation and affordability remain favorable, rising rates don’t bode well for the industry, he wrote in a note earlier this week.
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