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Higher Rates Break Homebuilder Stocks

Higher Rates Break Homebuilder Stocks

June 21, 2022
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Undoubtedly the most important story of the past week is the historic move in interest rates. While this is a trend that has been firmly in place for months, it has accelerated even more following last Friday’s higher than expected CPI report. That report prompted the Federal Reserve to hike interest rates by 75 basis points for the first time since 1994 on Wednesday and sent the 2-year yield to its highest level since 2007. Moves on the long-end of the curve have been only slightly less extreme, with the 10-year yield hitting its highest level since 2011 and the 30-year yield briefly tagging 2014 levels.

Today, we want to highlight one of the most prominent groups that higher interest rates put pressure on: homebuilders. As shown in the LPL Chart of the Day, the S&P 500 Homebuilding Index has crashed through a major support level this week and extended its losses from the December highs to more than 40%.

View enlarged chart.

“Expecting homebuilders to underperform amid skyrocketing interest rates isn’t exactly a bold call,” said LPL Financial Technical Market Strategist Scott Brown. “But our takeaway from the recent breakdown is that there is little reason to think this trade is over or the trend is on the verge of reversing.”

To put some numbers to just how dramatic the interest rate move is to potential home affordability, consider this scenario. Someone looking to purchase a $300,000 home, with a 20% down payment and a 30-year fixed rate mortage (using the Bankrate.com National Average) would have faced a monthly payment of $1,047 at the end of last year when the average fixed rate 30 year mortgage was 3.27%. Cut to today, and the 5.91% mortgage rate would increase that monthly payment by 36% to $1,425, and that doesn’t even begin to factor in the other inflationary forces that consumers are battling right now. From a purely technical standpoint, we see little evidence that interest rate moves are done, and would continue to expect homebuilders to underperform the broad market, and potentially work lower in absolute terms as well.

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains firmly negative on the Consumer Discretionary sector where homebuilding stocks are categorized. However, weakness is certainly not limited to the homebuilers, as more than 90% of stocks in the sector are below their respective 200-day moving averages and the sector is the worst-performing year-to-date with a more than 30% loss. We will need to see considerable technical improvement from the current situation before we can recommend a change to current positioning.

 

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