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Rising Mortgage Rates Are Weighing On Homebuilders

John Murphy

John Murphy

Chief Technical Analyst, StockCharts.com

Editors Note: This article was originally published in John Murphy's Market Message on Saturday, May 18th at 9:17am EST.

The first page of today's Wall Street Journal carries the headline: "Era of Ultracheap Mortgages Ends as Rates Hit 7-Year High". The article goes on to point out that rising mortgage rates might make it harder for prospective home buyers to get mortgages or be able to afford them. And that could discourage homebuying, or at least start to slow it down. The fact that mortgage rates hit a seven-year high shouldn't come as a surprise to anyone since mortgage rates are influenced by the 10-Year Treasury yield which also hit a seven-year high last week. And it doesn't appear to be a surprise to investors who have been selling homebuilding stocks for most of 2018. The daily price bars in Chart 1 show the U.S. Home Construction iShares (ITB) tumbling -16% from the end of January to the lowest level since last October this past week. The ITB has also dropped below its 200-day moving average. The ITB underperformed the S&P 500 by -12% during that period of time. That relative weakness is reflected in the falling ITB/SPX ratio (solid area). So what happened in January to sour investors on homebuilding stocks? One likely answer was the surge in Treasury yields. Chart 2 shows the 10-Year Treasury yield breaking out in January to the highest level in three years. That was the first sign that mortgage rates were heading higher. Both hit a seven-year high this past week. But there's another factor which may also be hurting homebuilders. And that's the surging price of lumber.

It takes a lot of lumber to build a new home. And the cost of that lumber is getting a lot more expensive for homebuilders. Chart 3 (see above) shows the price of lumber surging to a record high during 2018. Since its bottom in 2015, lumber has more than tripled in price. It's doubled in price since the end of 2016. And it's gained more than 40% since the start of 2018. The circled area on Chart 3 shows that the price of lumber rose above its 2013 peak during the fourth quarter of last year to set a new record. After a short pullback, it rallied to another record this January. I suspect that the surging price of lumber may have also contributed to the weaker performance by homebuilders this year. You may recall my article from last Saturday about input costs for companies rising much faster than headline inflation numbers. That presents companies with the choice of absorbing those higher costs (which would hurt their bottom line) or pass those costs on to consumers. It's hard to imagine how such a big jump in lumber, which is a major input cost to homebuilders, can't be hurting their bottom line.

 
John Murphy
About the author: is the Chief Technical Analyst at StockCharts.com, a renowned author in the investment field and a former technical analyst for CNBC, and is considered the father of inter-market technical analysis. With over 40 years of market experience, he is the author of numerous popular works including “Technical Analysis of the Financial Markets” and “Trading with Intermarket Analysis”. Before joining StockCharts, John was the technical analyst for CNBC-TV for seven years on the popular show Tech Talk, and has authored three best-selling books on the subject: Technical Analysis of the Financial Markets, Trading with Intermarket Analysis and The Visual Investor. Learn More