The yield surge experienced this week certainly took its toll on homebuilder stocks. As the yield on the benchmark U.S. 10 -Year Treasury eclipsed 3.2 percent this week, you could hear the air coming out of the publicly traded homebuilder sector. The Dow Jones U.S. Home Construction Index was down 27% as of yesterday’s close. The year-to-date declines in the stocks of publicly traded homebuilders certainly don’t echo the “remarkably positive” economic circumstances that Fed chair Jerome Powell was playing up this week. I can only assume he was referring to the Wall Street bonus pool.
Here’s a look at some of the share price declines so far this year among the largest homebuilders as of Thursday’s close:
- Lennar – Down 29%
- D.R. Horton – Down 21%
- Pulte Group – Down 28%
- Toll Brothers – Down 33%
- LGI Homes – Down 46%
As you can see, there is practically nowhere to hide if you are a publicly traded homebuilder, not with Fed bent on raising interest rates. Whether it’s luxury, mid-tier or affordable price segments, pretty much all builders have been experiencing the bountiful consequences of that Fed asset inflation mean reversion. While major stock market indices may be at or near record highs, the home construction index is signaling that higher rates will have significant implications for future economic growth.
A group of housing industry experts will be meeting for breakfast today right here in the DFW area, likely to ignore this significant collection of evidence. The listed speakers for this real estate 2019 forecast event include NAR’s chief economist, Lawrence Yun, RECenter A&M chief economist Jim Gaines and the Dallas Morning News real estate editor, Steve Brown.
Rather than pay the $45 event registration fee, it might be more helpful just to look at the attached graphics. I’m pretty sure no one at the event is going to mention the fact that home builder stocks are essentially in a bear market right now. I’m pretty sure there will be a healthy dose of optimism presented by the economists speaking at this real estate event even though inventory is now creeping up throughout the Dallas-Fort Worth market. It’s a safe bet that those offering their 2019 “forecasts” are going to temper any unpleasant data with bright prospects for future growth.
While the prospects for future growth are promising, there are still some consequences (both fiscal and monetary) that have yet to be dealt with. My personal opinion is that the market action in the homebuilders is an early warning of what lies in store. Wage growth in the U.S. is barely keeping up with inflation at best. Home prices are near record highs. Stock buybacks are at record highs. Just about everywhere you look asset prices have been inflated to keep up appearances. The big question is what’s left when you reach the vacuum on the other side of all that can kicking.
The U.S. home construction index is telling us that the economy is not as strong as advertised. The recent decline in both median and average new home prices is telling us that buyers are tapped out. Builder’s aren’t constructing smaller and cheaper homes because they want to. This recent development is strictly out of necessity. Preliminary September data from the North Texas MLS show that the average price of a new home was flat compared to last year while the median price of a new home sold in the Dallas-Fort Worth area declined 2 percent from the same time a year ago. Without lower prices, sales volumes will start collapsing with higher rates, particularly since new home prices are far more expensive than prices of existing/preowned homes.
For those who witnessed the last housing bust, you will likely appreciate the similarities. Of course one of the integral pieces of the last housing crash was the Federal Reserve’s rate hike parade into the teeth of a massive bubble. This new everything bubble is definitely different than the last one, but that doesn’t mean the end result will be any less destructive.
For what it’s worth, I would not be surprised to see a whiplash reaction/correction in yields back below 3 percent. Shorting the 10-year treasury is currently an extremely crowded trade. It’s pretty obvious that the economy will not withstand higher rates, so something has to give. I suspect there are some swamp creatures in D.C. who will do everything in their power to keep up appearances past the November elections.
“He did not care for the lying at first. He hated it. Then later he had come to like it. It was part of being an insider, but it was a very corrupting business.” Ernest Hemingway – For Whom The Bell Tolls
Thank you Aaron for another realistic look at the housing market.
1) Yes, housing is a leading indicator for the U.S. economy.
https://twitter.com/EconguyRosie/status/1022134803779526656
“Housing is a leading indicator, with huge multiplier impacts”
2) “The big question is what’s left when you reach the vacuum on the other side of all that can kicking.”
Yes, using debt for buying instead of savings and investment “pulls demand forward”, leaving a significant “air pocket” somewhere out there in the (not too distant) future, when credit becomes maxed out, as they are now.
“We no longer have business cycles, we have credit cycles.” – Peter Boockvar
3) Yes, higher rates are anathema to a highly indebted economy. As in the most recent previous cycles, the Fed will raise until “something breaks”. The Fed is a one trick pony. I don’t see this playing out much differently than in bubbles 1.0 (tech/dot com), 2.0 (housing 1.0). Since, as you mentioned, we’re now experiencing “the everything bubble” (bubble 3.0), I think there will be a lot more of “something breaks” events this time, and not limited to only a one or two asset classes.
4) Yes, the homebuilders are a good indicator and a proxy for the housing market. Although, their PR departments will no doubt try to put some “lipstick on a pig”, there’s no stopping the process which is already well underway.
I’m no economist, but neither is this “rocket science”. The unwind and downturn are inevitable, since already “baked into the cake” by the unprecedented artificial stimulus on the way up since the last downturn. Rinse and repeat.