Homebuilders poised for gains

new york — Some investors are betting on shares of homebuilders to outperform US stocks at large, but with interest rates expected to rise they may have to wait several months before those bets pay off.

The US economy looks ideal for homebuilding stocks to benefit. The unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels in 17 years, according to the Conference Board.

And demand for housing in an already tight market is being supported by the many millennials

The continued rally in yields is a potential red flag Jared Woodard, investment strategist at Bank of America Merrill Lynch

seeking to purchase their first home, several investors said.

The US Commerce Department’s data on April housing starts will be released on Wednesday, followed by data on newhome sales on May 23.

But other factors could raise costs for home buyers, potentially hampering home sales. A sharp rise this year in US Treasury yields reflects increasing worries about inflation and fears that the Federal Reserve will raise interest rates more aggressively than has been expected.

The yield on the 10-year Treasury note is used as the benchmark for mortgage interest rates; higher rates increase mortgage costs for home buyers. “The continued rally in yields is a potential red flag,” said Jared Woodard, an investment strategist at Bank of America Merrill Lynch in New York.

The 10-year Treasury yield has briefly exceeded the 3 per cent mark, the highest level since January 2014 and more than 50 basis points higher than where it started the year.

The S&P Composite 1500 Homebuilding index has lagged the broader market, falling 16.9 per cent from its January 22 peak, which is more than three times the percentage decline of the S&P 500 from its high that month. In 2017, the homebuilding index soared 74.8 per cent from the previous year. — Reuters