Due to record low interest rates, increased demand and limited supply, the U.S. housing market soared the last couple of years. Prospective homebuyers were offering well above asking price, waving inspections, and taking houses sight-unseen all in an effort to win their dream homes. On the other side, sellers were fielding multiple offers and were often under contract within days of listing.

All of this was a boon for homebuilders. With limited supply causing an aggressive market, more and more people were choosing to build their own homes.

From mid-March 2020 through December of 2021, the iShares U.S. Home Construction ETF (BATS:ITB) rose over 170%. Owning homebuilders was a good bet.

But as the calendar flipped to 2022 things began to change. Since the beginning of the year, ITB is down nearly 28%.

In today’s Market 360, we’ll talk about what changed for homebuilders and whether or not these stocks are still a buy…

Homebuilders Change Their Tune

According to the National Association of Home Builders/Wells Fargo Housing Market Index, builder confidence for new single-family homes dropped two points to 77 in March. According to CNBC, a reading above 50 is considered positive sentiment. But the recent report marks the fourth-straight month-over-month decline in the index.

“Of the index’s three components, current sales conditions fell 2 points to 85. Buyer traffic dropped 6 points to 60, and sales expectations in the next six months increased 3 points to 73 following a 10-point drop in March.”

With soaring mortgage rates, the 30-year fixed hitting the highest rate in over a decade at 5.15%, and builders dealing with ongoing supply chain issues for materials pushing projects back months… homebuilders are expecting people to start to bow out of the market.

In fact, it’s already happening.

Last week, Redfin reported that home sales fell 4% in March. Redfin chief economist Daryl Fairweather said, “We expect the combination of surging mortgage rates and record-high home prices to cause more homebuyers to drop out of the market.”

And, as reported by The New York Times:

“Homebuilders, many of whom have accrued backlogs of eager buyers, say rising mortgage rates have forced them to go deeper into those waiting lists to sell each house. In a recent survey of builders, Zelman & Associates, a housing research firm, found that while builders were still seeing strong demand, cancellations had inched up…”

And, while housing starts have been on the rise… increasing 0.3% seasonally last month according to the U.S. Commerce Department… new home completions remain low due to the supply chain issues mentioned above and a tight labor market.

NAHB Chief Economist Robert Dietz said:

“The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market”

Now, to be clear, I don’t expect to see what we saw when the housing market bubble burst in 2008. But in the short term I do expect higher rates to affect homebuilders — and not in a good way.

Stay Away from Most Homebuilders for Now

As I shared last week, it is inevitable that the Federal Reserve will continue to raise key interest rates, most likely in 0.5% increments, to better align with market rates. However, this can have a negative impact on the U.S. economy, as higher rates weigh on economic growth.

The example I gave was, as the central bank lifts rates, it effectively “pricks” the housing bubble.

And recently we’ve been seeing the start of the homebuilder decline in Portfolio Grader.

In fact, the top three holdings of the iShares U.S. Home Construction ETF are now sells:

Not good. As you can see, each stock holds a D-rating, which means that these are underperforming stocks and automatic sells. I should add that they also earn a D-rating for their Quantitative Grade, which tells me that institutional buying pressure has all but dried up. You deserve better!

The fact of the matter is, with rising rate interest rates, continuing supply chain issue and home sales on the decline, I would stay away from homebuilders right now.

There are far better opportunities out there right now. I’m talking about fundamentally superior stocks…

Take my Growth Investor stocks, for example. My Growth Investor stocks are well-positioned to benefit in the inflationary environment. As I discussed last week, inflation is still red-hot on both the consumer and wholesale levels. And it’s affecting the U.S. housing market in a big way.

That’s why it’s important to focus on strategic inflation hedges This includes my Growth Investor Buy Lists, which are chock-full of fundamentally superior energy, fertilizer, food and shipping and semiconductor stocks. In fact, all of my energy stocks are forecast to report at least double-digit earnings growth in their latest quarters, with several expected to post triple-digit year-over-year earnings growth.

Join me at Growth Investor today to receive full access to my “inflation-proof” Buy Lists. This includes my newest recommendations and Top Stocks lists.

P.S.  There is a great divide opening up in America — and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.

On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.

What’s happening is only going to gather in strength over the coming decades…

It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.

It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.

It’s free to watch, and by doing so, I know you’ll be ahead of everyone else struggling to understand what is really going on.

The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: