Home-builder stocks entice despite 'no sign of life' in mortgage applications

By Christine Idzelis

Yardeni Research was surprised by the sharp drop in consumer plans to buy homes as mortgage rates have come down

While high home prices remain an obstacle to prospective home buyers even as mortgage rates fall, pent-up demand should benefit home builders in the stock market, according to Yardeni Research.

"There's no sign of life in the latest report on mortgage applications for purchasing homes that was released this morning," said Yardeni analysts in a note Wednesday. "The problem may simply be that affordability remains depressed because home prices are at record highs."

The median price of a single-family home in the U.S. based on a 12-month average is now $404,000, "up a whopping 47%" since just before the COVID-19 pandemic began, according to the note. An August consumer-confidence survey released Tuesday showed a sharp drop in the percentage of people planning to buy a home within the next six months, Yardeni said, citing the chart below.

Yardeni analysts said they were surprised by the sharp drop, as the 30-year mortgage rate has fallen to 6.46%, from 7.79% at the end of October 2023. But they also noted the mortgage rate remains high relative to the yield on the 10-year Treasury note.

The 10-year Treasury yield BX:TMUBMUSD10Y edged up to 3.840% Wednesday, although it is down so far this month and this year to date, according to Dow Jones Market Data, citing closing levels at 3 p.m. Eastern time. The yield is 86.6 basis points below its 2024 closing high of 4.706% on April 25.

"We are still expecting a rolling recovery from housing's rolling recession," but not a "V-shaped" one, said Yardeni. "We favor overweighting S&P 500 home builders given the direction of interest rates and plenty of pent-up demand."

Read: Homebuilder ETFs surge as investors await Fed rate cuts

Meanwhile, shares of the SPDR S&P Homebuilders ETF XHB - an exchange-traded fund that tracks an equal-weighted index of U.S. companies involved in the home-building industry - have climbed around 22% this year based on Thursday morning trading.

The S&P 500 index SPX, a measure of large-cap stocks in the U.S., has gained around 18% in 2024, based on FactSet data Thursday morning.

The SPDR S&P Homebuilders ETF's portfolio includes such stocks as D.R. Horton Inc. (DHI), KB Home (KBH), Meritage Homes Corp. (MTH), Taylor Morrison Home Corp. (TMHC) and Toll Brothers Inc. (TOL), according to data on the website of State Street Global Advisors.

The fund, with around $2 billion of assets under management, has attracted more than $180 million from investors so far this year, according to FactSet, at last check.

Read: Here's what Harris and Trump propose for the housing shortage and other money matters

Shares of the SPDR S&P Homebuilders ETF were up 0.4% on Thursday morning as the U.S. stock market broadly climbed following a revised estimate on U.S. economic growth in the second quarter that was stronger than expected.

The Dow Jones Industrial Average DJIA was up 0.6% in Thursday morning trading, while the S&P 500 SPX climbed 0.8% and the technology-heavy Nasdaq Composite COMP jumped 1.3%, FactSet data show, at last check.

-Christine Idzelis

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08-29-24 1105ET

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