Declining interest rates, falling gasoline prices, solid job growth and the recent announcement by the FHA that it would lower mortgage insurance premiums have been the catalysts behind the breakout in housing-related stocks. After notching up gains in 2014, housing stocks are outperforming the broader markets.
Last week’s better-than-expected gains in payrolls, which were accompanied by a decline in hourly earnings, should keep the Fed on the sidelines and allow housing stocks to gain further traction.
A 252,000 increase in non-farm payrolls, combined with revisions to the prior two months reports, was better than expected. The number of hours worked increased to 34.6, and the unemployment rate dipped to 5.6%, which were also both better than expected.
What surprised market participants even more was the 0.2% decline in wages and the downward revisions from 0.4% to 0.2% in November. The Fed not only focuses on growth, but additionally on wage inflation. The decline in hourly earnings has likely tempered market fears of an imminent acceleration in interest rates, which has pushed the 10-year yield back below 2%.
The decline in average hourly earnings had an immediate impact on U.S. Treasury yields, which are the driving force behind mortgage rates. Mortgage bonds trade as a spread to U.S. Treasuries, and fluctuate along with the Treasury bond prices. Bond traders are usually concerned with future inflation expectations that have tumbled to 4-year lows, according to the 5-year, 5-year forward rate of inflation as reported by the St. Louis Federal Reserve. This further helped buoy bond prices.
Friday’s announcement by the Federal Housing Administration that premiums on mortgage insurance would be lower added to the rally in housing-related stocks. According to the FHA mortgage insurance on both 30-year lows with less than 5% down as well as 15-year loans with less than 5% down would decline by 50 basis points.
The recent rapid decline in gasoline prices has also helped the housing sector. According to AAA, the average price of gasoline in the U.S. on Jan. 12 was $2.13 per gallon, down nearly 7 cents per gallon from the prior week and down 32% from a year earlier. With the average family in the U.S. saving approximately $1,000 per year on gasoline prices, the extra discretionary income could help boost the housing market.
To take advantage of further increases in the housing space, I can recommend two ETFs that focus on different areas of the housing market.
Click to Enlarge The iShares U.S. Home Construction ETF (ITB) is a pure play on home construction. This ETF focuses on homebuilders, with top holdings including D.R. Horton, Inc. (DHI), Lennar Corporation (LEN), PulteGroup, Inc. (PHM) and Toll Brothers Inc (TOL).
The technicals on the stock point to higher prices. ITB has broken out above a downward sloping trend line as momentum has turned positive. The MACD (moving average convergence divergence) index has generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) has crossed above the nine-day moving average of the spread.
The next level of resistance is seen near the 2006 lows at $32. Support is seen near the 50-day moving average at $25.25.
Click to Enlarge An alternative is the SPDR S&P Homebuilders (ETF) (XHB). This ETF focuses on homebuilders as well as companies that make products that are used in homes. In addition to PHM, TOL and LEN stock, the ETF counts Owens Corning (OC) and USG Corporation (USG) among its largest holdings.
The technicals on the XHB are also attractive. The XHB has also broken out, and the MACD has also generated a buy signal.
Target resistance is the 2006 highs near $42.5, while support on the ETF is seen near the 50-day moving average at $32.90.
Homebuilders and housing-related stocks should continue to reap the benefits of lower mortgage premiums, declining fuel prices and lower interest rates. Positive technicals point to higher prices for both the ITB and the XHB.
As of this writing, David Becker did not hold a position in any of the aforementioned securities.