Why Yardeni likes home-builder stocks despite a drop in home-buyer interest

MW Why Yardeni likes home-builder stocks despite a drop in home-buyer interest

By Christine Idzelis

'There's no sign of life in the latest report on mortgage applications,' Yardeni Research noted

While high home prices remain an obstacle to prospective home buyers even as mortgage rates fall, pent-up demand should benefit home builders in the stock market, according to Yardeni Research.

"There's no sign of life in the latest report on mortgage applications for purchasing homes that was released this morning," said Yardeni analysts in a note Wednesday. "The problem may simply be that affordability remains depressed because home prices are at record highs."

The median price of a single-family home in the U.S. based on a 12-month average is now $404,000, "up a whopping 47%" since just before the COVID-19 pandemic began, according to the note. An August consumer-confidence survey released Tuesday showed a sharp drop in the percentage of people planning to buy a home within the next six months, Yardeni said, citing the chart below.

Yardeni analysts said they were surprised by the sharp drop, as the 30-year mortgage rate has fallen to 6.46%, from 7.79% at the end of October 2023. But they also noted the mortgage rate remains high relative to the yield on the 10-year Treasury note.

The 10-year Treasury yield BX:TMUBMUSD10Y edged up to 3.840% Wednesday, although it is down so far this month and this year to date, according to Dow Jones Market Data, citing closing levels at 3 p.m. Eastern time. The yield is 86.6 basis points below its 2024 closing high of 4.706% on April 25.

"We are still expecting a rolling recovery from housing's rolling recession," but not a "V-shaped" one, said Yardeni. "We favor overweighting S&P 500 home builders given the direction of interest rates and plenty of pent-up demand."

Read: Homebuilder ETFs surge as investors await Fed rate cuts

Meanwhile, shares of the SPDR S&P Homebuilders ETF XHB - an exchange-traded fund that tracks an equal-weighted index of U.S. companies involved in the home-building industry - have climbed 21.3% this year through Wednesday, according to FactSet data.

The S&P 500 index SPX, a measure of large-cap stocks in the U.S., has gained 17.2% in 2024.

The SPDR S&P Homebuilders ETF's portfolio includes such stocks as D.R. Horton Inc. $(DHI)$, KB Home (KBH), Meritage Homes Corp. $(MTH.AU)$, Taylor Morrison Home Corp. $(TMHC)$ and Toll Brothers Inc. $(TOL)$, according to data on the website of State Street Global Advisors.

-Christine Idzelis

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August 28, 2024 18:02 ET (22:02 GMT)

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