Housing Stocks Plunge Amid Soaring Mortgage Rates

Apr. 08, 2022 1:09 PM ETSPDR Homebuilders ETF (XHB), XLREPFSI, PHM, VMC, ITB, NAIL, HOMZ, PKB, IYR, REZ, REM, RWR, VNQ, ICF, SPY, DIA31 Comments

Summary

  • The PHLX Housing Index has been down sharply since the beginning of the year.
  • Mortgage rates are now approaching 5%.
  • The last time rates got this high, the sector broke.
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New homes on a quiet street in Raleigh NC

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Housing stocks have been slammed in recent weeks as interest rates have soared. The move higher in rates is due to the Fed's ambitions to raise rates and reduce the size of its balance sheet, including mortgage-backed securities. The outlook for this sector may be bleak as rates continue to rise, causing a slowdown in the industry as home prices need to adjust lower to account for higher rates.

This has sent the PHLX Housing Index (.HGX) sharply lower over the past couple of months and is now teetering on a major breakdown, with the potential to head back to pre-COVID levels. The index contains home builders and companies that provide lumber, appliances, and mortgages.

The last time the mortgage rate got this high was back in late 2018, and when that happened the HGX index fell off a cliff and eventually took the entire stock market with it.

chart

Bloomberg

Soaring Rates

The MBA 30-Year national mortgage rate hit 4.9% last week. This mortgage rate was up from 3.3% on Dec. 31, 2021. The jump in rates certainly puts upward pressure on the monthly payments made on a new mortgage. For example, a $500,000 mortgage at 3.3% for a 30-year fixed is around $2,190 a month. That jumps to approximately $2,645 when the rate rises to 4.9%. To get the monthly payment back down to that $2,190 at the lower 3.3% rate, a borrower can only afford a mortgage of approximately $412,000. Higher rates certainly reduce the purchasing power of potential homeowners.

chart

Bloomberg

Sector Weakness

The relationship between the HGX index and the MBA 30-Year mortgage rate is inversely correlated, with lower mortgage rates leading to higher returns in the HGX and vice versa. The higher rates climb, the more pressure it will put on the housing sector and the components in the group.

chart

Bloomberg

The HGX index has fallen below technical support at 405 and is heading toward its next support level at 375. After that, there's no support until 358 and then down to 314. But more importantly, there's a very bearish technical pattern in the chart known as a double top pattern. That pattern was confirmed when it fell below the neckline at 440. The double top is a very negative pattern and could suggest a long-term reversal of the trend in the group.

Chart

TradingView

When breaking this down further, we can see the weakness in many of the components within the sector. PulteGroup (PHM) is facing a similar breakdown on the chart, suggesting there may be further declines for the stock to come. A meaningful break below $41 could drop the shares to as low as $37.50.

chart

TradingView

PennyMac Financial Services (PFSI), a mortgage lending service, has fallen more than 30% from its highs. Here, the chart shows a tremendous amount of weakness, with the potential for the stock to fall to around $39.50.

chart

TradingView

Even materials companies like Vulcan Materials (VMC) are struggling. It hasn't completely broken down yet, but it shows signs of weakness. The shares are heading lower towards a significant support level at $169. If broken, that's a level that could drop the shares back to $152.

chart

TradingView

The weakness across the housing sectors appears to be spread pretty evenly as investors begin to weigh the risk of rising interest rates and the potential impacts it's likely to have on the ability of the consumer to buy homes at these elevated prices as mortgage rates soar. There's no doubt though the cost to buy a house just got a lot more expensive.

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I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

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Charts used with the permission of Bloomberg Finance L.P.

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