Homebuilding stocks - for what is falling must rise again (XHB, ITB, NAIL)

Starting this thread to anticipate the rebound of stocks related to homebuilding.

The housing market is still quite hot:

Anecdotal accounts are all about absurd bidding wars and all-cash purchases way over asking.

Yet, homebuilder and housing related stocks have been taking a beating. The PHLX Housing Index (HGX), the SPDR Homebuilders ETF (XHB) and the iShares Home Construction ETF (ITB) have been falling steadily for the last 3 months. XHB is down 29% from recent ATHs; ITB is down 31%. And for those who like to live dangerously, there’s the “Direxion Daily Homebuilders & Supplies Bull 3x Shares ETF” NAIL which has fallen 71%. Not mentioning individual companies, but we at some point we’d want to fill that gap.

The culprit is the 30-year mortgage, which has shot up to 5% in a matter of months from ~2.85%, and is showing no signs of slowing down. The 30-yr rate and housing stocks have an inverse relationship:

Which can be better seen by taking the inverse of the 30-yr mortgage rate.

Lumber prices have also come down falling about 40% in just a month and a half.

In terms of a general take on housing, unless a recession causes major unemployment, difficult to see how there is a significant deterioration in the housing market. Higher mortgage rates should pump the brakes on prices, though not really make them fall much, as inventory is low and there is robust demand. I read somewhere that vastly more homeowners refinanced to sub 3% mortgages during the last two years, so mortgage servicing is much less of an issue compared to the Housing Crisis. And banks are much more careful about checking affordability so foreclosures from not being able to make mortgage payments should be low. Foreclosures would also need some time to catch up even if they were to rise, as courts are still backlogged with all the ones from the Covid moratorium times. Finally, with price rises likely slowing down, homeowners would be in no hurry to sell, keeping inventory tight.

This is all to say that it would be surprising if housing took a sizeable arrow to the knee.

So, what’s the trade? The most obvious seems to be to wait till XHB (and its constituent) bottoms, and then ride it up.

When will that be? Well, it’s a little hard to tell (isn’t it always…), which is why this is in the Long Term section of the forum. Let’s use this thread to keep an eye on:

  • housing sales and inventory levels - this will alert us to deteriorations in the housing market, which can keep these stocks falling
  • the 30-yr mortgage rate - if this flattens out and there is no significant slowdown in sales or increase inventory, we could be looking at a rebound

#housing #lumber #homebuilder #xhb #itb #nail

10 Likes

Cheers for this Ni, i’ll try and look into this more on monday. Looks interesting.

2 Likes

Yea interesting stuff, gonna read more into this as well

3 Likes

We went from imminent gamma squeezes to wheat futures and now fucking homebuilding etfs. Im in

3 Likes

Doctor Ni I will be watching. Have played puts on TOL back in Feb for run up to earnings but poo poo and held a bit after ER came out. Should have rolled them. Either way like what you’re cooking

4 Likes

Redfin came out with a piece on Friday that provides additional data that highlights that:

  1. Demand is slowing - fewer tours and fewer mortgage applications:
  • Fewer people searched for “homes for sale” on Google—searches during the week ending April 9 were down 3% from a year earlier.
  • The seasonally-adjusted Redfin Homebuyer Demand Index—a measure of requests for home tours and other home-buying services from Redfin agents—has declined 3% in the past four weeks, compared to a 5% increase during the same period last year. The index was up 2% from a year earlier.
  • Touring activity from the first week of January through April 10 was 23 percentage points behind the same period in 2021, according to home tour technology company ShowingTime.
  • Mortgage purchase applications were down 6% from a year earlier, while the seasonally-adjusted index increased 1% week over week during the week ending April 8.
  • For the week ending April 14, 30-year mortgage rates rose to 5%—the highest level since February 2011. This was up from 4.72% the prior week, and the fastest three-month rise since May 1994.
  1. But the market is still very hot - home prices are higher than ever, fewer homes being listed, more homes being sold in shorter periods of time, more homes sold over list price:
  • The median home sale price was up 17% year over year to a record high of $389,178.
  • The median asking price of newly listed homes increased 14% year over year to $397,747.
  • The monthly mortgage payment on the median asking price home rose to a record high of $2,288 at the current 5% mortgage rate. This was up 35% from a year earlier, when mortgage rates were 3.04%.
  • Pending home sales were up 1% year over year.
  • New listings of homes for sale were down 7% from a year earlier, the 21st-straight annual decline.
  • Active listings (the number of homes listed for sale at any point during the period) fell 23% year over year.
  • 58% of homes that went under contract had an accepted offer within the first two weeks on the market, an all-time high. This was up from the 55% rate of a year earlier.
  • 44% of homes that went under contract had an accepted offer within one week of hitting the market, an all-time high. This was up from 41% during the same period a year earlier.
  • Homes that sold were on the market for a median of 18 days, down from 26 days a year earlier.
  • 54% of homes sold above list price, up from 42% a year earlier, and just shy of the all-time high seen in July of 2021.
  • On average, 3.2% of homes for sale each week had a price drop, with 13% dropping their price in the past four weeks. That’s up from 10% a month earlier and 9% a year ago. The share of listings with price drops is climbing faster during this time of year than they have since at least 2015. Typically during this time of year the share of homes with price drops is slightly down month over month. The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, rose to an all-time high of 102.4%. In other words, the average home sold for 2.4% above its asking price. This was up from 100.4% in 2021.

Are people just FOMO-ing into houses now!? :thinking:

4 Likes

This is all very interesting, will definitely follow! Posting cause-

Are people just FOMO-ing into houses now!?

Anecdotally, yes. I’m 32 and over the past 6 months have had three friends between 28-35 and a brother a couple years younger than me all looking for houses and willing to overpay. He was saying he has friends in the same mindset too. As far as the sample size of those four go (lol), a major reason for the hurry aside from trying to catch ‘low’ prices before everything was sold/more expensive was “corporations buying all the houses up” and/or “rich Chinese/overseas investors parking their money in housing, there’s gonna be none left”. A lot is impatience too, they’d rather start paying high mortgages now than rent for another year or two. As I said, purely anecdotal, but it’s an anecdote that seems to be shared by more and more people. Hmm, I have family who deal in realty and some in insurance, I’ll try and get a barometer reading from them on some of this, hopefully there’ll be something useful that pops out from those conversations

2 Likes

Here’s something that new to me. Instead of HELOCs or 2nd mortgages, people are actually selling a percentage of their home’s value:

1 Like

Nice work here. After reading this the other day I randomly stumbled on an article that said home building is at a level that has not been seen since 2010. Yes 2010 that’s about as the US came roaring back out of the housing bubble that burst. I took a small far out position in NAIL as it was near its low since summer 2020. Feel like with the rising price of existing homes and the lowering price of lumber many people would elect to build one as to buy someone else’s over inflated problems.

3 Likes

XHB keeps falling:

Homebuilder cancellation rates have ticked up quite a bit:

Parking these data points here; need to find additional data points around new builds vs current inventory and other dynamics.

1 Like

BLDR was one that Dook mentioned and has done well during the pump, but has been stair stepping its way down slowly. Might be worth watching?

Came across a decent read in regards to lumber as an indicator.

1 Like

Housing market is doing weird things:

  1. Sales of both new and existing homes are down (images #1 and #2)
  2. Months supply of new and existing homes are up (images #3 and #4)
  3. Yet median sales price of homes is still going up (image #5)

Hot off the press - the rapid cooling in the housing market continues:
https://twitter.com/DeItaone/status/1552292787391004675

(Source)

(Source)

Housing market is cooling down super-pronto.

New home sales are down 12.6% MoM, sending months supply of new houses to near-2008 levels. That’s 10.9 months of supply now!

image

Figures for existing homes show a similar trajectory, though not as marked.

This could be seen as a signal of financial conditions softening, thereby reducing the need for aggressive hikes from the Fed.

2 Likes

Closing this thread out to continue the discussion here: Housing Data think tank (previously HD DD)

As they serve near identical purposes.

1 Like