Lower rates may boost housing
new york — Lower US interest rates could help support outperforming US homebuilder stocks, even as they raise worries about the economy, while a bonanza of industry data and Federal Reserve speakers this week are likely to help shape the outlook.
After underperforming in 2018, the PHLX Housing Index is up about 30 per cent for the year so far, roughly double the year-todate gain of the benchmark S&P 500 index.
Mortgage rates have been declining with US Treasury debt yields, and the outlook for interest rates suggests further easing after the Federal Reserve lowered rates last month and indicated it could cut again this year, depending on data.
This week, US 30-year Treasury yields fell to a record-low below 2 per cent, while benchmark 10year yields declined to a threeyear trough as trade tensions linger and global economic growth continues to slow.
The 30-year fixed mortgage rate has dropped to 3.60 per cent from a peak of 4.94 per cent in November, according to mortgage finance agency Freddie Mac. Mortgage rates are often tied to the benchmark 10-year Treasury yield.
Strategists said that could bode well for homebuilders and the housing market, which has been
struggling because of land and labour shortages. A report on Friday showed US homebuilding fell for a third straight month in July amid a steep decline in the construction of multifamily housing units, even as the data provided a positive sign for housing: A jump in permits to a seven-month high.
This week, the US Commerce Department will release data on July new home sales. Housing and homebuilding stocks should continue to do well as long as rates remain low, but the potential for slower demand is a risk, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
“Lower interest rates lead to lower mortgage rates [which] lead to increased demand for homebuilders,” he said. “You counter that with potential concerns that, if a recession is coming, even if rates are at historically low levels, demand for everything is going to be somewhat mitigated.”
Eric Marshall, portfolio manager at Hodges Capital Management in Dallas, has seen relatively good traction in housing even with the turbulent markets. Lower rates are a plus, he said, along with an unemployment rate at its lowest level in years.
“Consumer savings have come up, household formation continues to grow faster than the supply of housing,” Marshall said. “And I think all of those things coming together make for a more stable environment for the publicly traded housing stocks.”
Recent results from some top homebuilders were mostly stronger than analysts expected, but some forecasts disappointed investors, underlining persisting problems in the housing market. —
Lower interest rates lead to lower mortgage rates, which lead to increased demand for homebuilders michael James, Director of equity trading at Wedbush Securities