Homebuilder stocks serve as the pulse for the housing market’s vigor, often reflecting expectations around housing market strength. A rise in these stocks usually signals an anticipated upswing in housing demand and prices, while a dip could hint at weakness to come. Lumber is tied to this dynamic as well, given how correlated lumber is to housing starts. A strong signal for housing market activity would be housing stocks outperforming other sectors of the stock market while lumber prices increase.
Now the opposite may be playing out.
Following hot inflation data Wednesday, homebuilder stocks took a big hit. When I look at the chart of the SPDR Homebuilders ETF (NYSEARCA:XHB) as a proxy, it does seem as if the ETF may have peaked. The fund went down considerably more than the S&P 500 as rates surged.
What Is Going on With Homebuilder Stocks?
This shouldn’t be that controversial. If the Federal Reserve continues to hike rates, mortgage rates are likely to continue to rise. This would cause a fall in demand for housing and maybe some forced selling of second homes, releasing supply in housing.
Now I mentioned that lumber prices are closely tied to housing starts, signaling the demand for construction materials as a precursor to actual building activities. Lumber, like housing stocks, has taken a big tumble as investors fear further rate hikes.
In other words, both lumber and housing stocks are now giving the same message. I find this potentially to be ominous when it comes to what it implies for the economy should strength not return soon. And you can’t really get inflation down to 2% unless home prices drop meaningfully, reversing the wealth effect that’s been a big driver of consumer sentiment for the past three years.
What the Housing Market Warning Says
Let’s face it. It’s about time we see weakness in housing.
According to Redfin, the share of home listings that are considered affordable nationwide based on media income is at a multi-decade low of just 16%. This ties directly into inflation given how elevated the shelter component of CPI continues to be. Something has to break. It’s just a question of when, not if. New inventory has been coming live to the market as homebuilders have been feverishly building to meet demand, but as is always the case, this inevitably leads to oversaturation.
I do think homebuilder stocks are worth paying close attention to in the coming months. If that weakness persists, watch out. Housing may be in trouble.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
