5.93, that’s a magic number for a lot of people today.
According to Bankrate.com, 5.93% is the best rate that I can get for a 30-year mortgage today, just below that psychological 6% level that the market has been watching for the last two months.
That number, along with some earnings results from last night have one sector of the market charging higher.
The Homebuilders as represented by the SPDR Homebuilders ETF (XHB) are trading 2% higher today on good news from the interest rate market and a healthy earnings report from Toll Brothers (TOL).
Last night Toll Brothers announced earnings results that were better than Wall Street’s expectations as the company continues to do what nobody thought they could just a few months ago, extending the length of the housing market boom.
For the most recent quarter, the company beat analysts’ expectations for earnings per share by $0.29 with revenue that grew 1.5% year over year.
But the more exciting part of the earnings call came from management as they said…
“We are also encouraged by our solid deposit and traffic activity through the first three weeks of August. With mortgage rates at their lowest point in a year and trending lower, favorable demographics, and continued imbalance in the supply and demand of homes for sale, we are optimistic that demand will remain solid through the end of fiscal 2024 and into 2025.”
Note the precision in the timeline of that statement?
Interest rates are coming down below 6% right now, and that's been a magic level for the perspective home buyers.
They've been waiting for that psychological level to break to act as a signal that it’s time to get out there and buy a house.
We've seen rates that have gone as high as 8% or so, and the prospective homebuyers were happy to rent apartments to avoid those high rates.
Now that rates are moving below 6%, we’re going to see those apartment dwellers get out there and start snapping the inventory that’s available, and there’s still not much of that inventory out there, but that’s going to change.
Remember, a lot of homeowners are in houses holding mortgages that are below 4% and 3%, some even some below 2%. They got into those low mortgage rates before or during the pandemic when inventory was high and rates were low. A true buyers’ market.
Those homeowners are one of the big reasons that we’ve seen such a drought in inventory, which is why the homebuilders have done so well.
Six percent isn’t going to get a lot of the existing homeowners to start listing their houses, but interest rates that start with a “4” will certainly thaw the market quickly.
That’s where the risk for homebuilders and to some degree homeowners sits.
Homeowners are enjoying the high prices that the housing market is reflecting right now, but a sudden surge in inventory of new and existing homes will erase much of the Pandemic Premium that the housing market still holds.
That’s the lurking problem the home builders.
Companies have slowed the production of multifamily buildings as they’ve started to see the writing on the wall.
Property rental companies are already reacting to the imminent thawing of the housing market by offering concessions to renters to help retention.
We all know that the selling season for existing homes starts in early spring every year.
20205’s spring selling season is likely to be one for the record books as lower interest rates will almost certainly lure a wave of existing home sellers into the market.
That increase in inventory will be the catalyst for lower housing prices and the end of the homebuilder’s bull run on the market.
Let’s look at it from two perspectives, a homeowner and a stock investor.
Homeowners that have been looking for an opportunity to downsize and capitalize on inflated housing prices may want to consider preparing for an early spring selling season.
With two rate cuts likely to happen between now and the beginning of 2025, mortgage rates should be threatening to break below 5% and even lower.
Keep in mind that the more signs that you see popping up around your town means more competition for your home. This is one time where being early is going to pay-off well.
Investors should expect to see the Homebuilder stocks and ETFs trend higher into the end of 2024 as the pace of new home sales picks up.
The rally should be worth another 8-10 percent in gains through January 2025.
At that point, reflect on Toll Brother’s statement… The end of the first quarter of 2025 should expect to see a slowdown in the homebuilder’s rally as existing homes will now start to pressure market prices lower, a condition that would cause the homebuilders to respond with concessions and lower prices.
That’s a deadly combination for the homebuilding stocks and the end of the three year housing bull market.
