Homebuilder stocks are often seen as a gauge for the health of the housing market. They reflect expectations about housing demand and prices. When these stocks rise, it usually indicates an expected increase in housing demand and prices, and vice versa.
Lumber prices also contribute to this dynamic, as they are closely tied with housing starts. A strong indicator of housing market activity would be housing stocks outperforming other sectors of the stock market while lumber prices increase.
However, recent developments hint at a potential downturn in the housing market. Following the release of hot inflation data, homebuilder stocks suffered a significant hit. The SPDR Homebuilders ETF (NYSEARCA:XHB), a representative for homebuilder stocks, seems to have peaked and experienced a significant decline compared to the S&P 500 as rates surged.
This trend shouldn’t be too surprising. Rising interest rates from the Federal Reserve are likely to result in higher mortgage rates. This could lead to decreased demand for housing and potentially force the sale of second homes, increasing the supply of available housing.
Lumber prices, which are closely tied to housing starts, have also taken a tumble. This is due to investors fearing further rate hikes.
In other words, both lumber and housing stocks are now sending the same message. This could be ominous for the economy if strength does not return soon. As the author of the source material states, “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.”
It may be time for the housing market to experience some weakness. According to data, the share of home listings considered affordable nationwide based on median income is at a multi-decade low of just 16%. This directly ties into inflation, as the shelter component of the Consumer Price Index (CPI) remains elevated.
The question is not if something will break, but when.
New inventory has been entering the market as homebuilders rush to meet demand. However, this can lead to oversaturation. It’s suggested to pay close attention to homebuilder stocks in the coming months, as persistent weakness could indicate trouble for the housing market.
While the opinions expressed in this article are those of the writer, it is important to consider the potential ramifications of these trends on the housing market and the broader economy. As always, investing involves risk, and past performance may not be indicative of future results.
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