Mortgage rates are on the rise following record high lumber prices. Together, these measures are starting to weigh on the stocks of home builders.
30-Year Mortgage Rate
The 30-Year fixed rate mortgage average in the United States hit 2.97% on Thursday, February 25th. Not only is this rate a 6-month high, but also the rise appeared to form a bottoming for rates. By surpassing the former peak of 2.79% on January 14th and leaving behind a trough, the 30-year formed the higher high and higher low that typically mark an uptrend.
Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; February 26, 2021.
Record High Lumber Prices
Lumber prices were making record highs when the World Trade Organization (WTO) ruled against lumber tariffs applied by the U.S. on Canada. After a dip, a rally, and another dip, lumber prices are back to record highs. The National Association of Home Builders (NAHB) marked the milestone by complaining these record prices add $24K to the price of a single-family home. Since the breakout on February 9th, lumber prices have continued to drift higher.
Home Builder Stocks
The iShares U.S. Home Construction ETF (ITB) made its last all-time high just as lumber prices broke out above the former all-time high. ITB is down 7.3% since then. Soaring rates helped drive ITB down 5.2% in one day. The ETF is now fighting to hold support at its 50-day moving average (DMA). The combination of rising mortgage rates and record high lumber prices put significant pressure on the near-term prospects for home builder margins and consumer demand for new housing.
The Trade
Time is now officially running out on the seasonal trade on home builders. In addition to the rising rates and record high lumber prices, the technicals on the stock market are leaning bearish. Still, I deferred to the rules of the trade by buying into the latest dip. The success of buying January’s dip helped to motivate me to stick to the trading plan. As the Spring selling season warms up, I fully expect the headwinds to keep a low ceiling over the prices of home builder stocks.
Be careful out there!
Full disclosure: long ITB call options