NEW YORK – Lower US interest rates may help outperform US home equity stocks, although they raise concerns about the economy, while a bonanza of industry data and Federal Reserve speakers next week is likely to help shape the outlook.  Following underperformance in 2018, the PHLX Housing Index is up about 30 percent for the year so far, about twice as far as today to date, compared to the S&P 500 benchmark index.
Mortgage rates have gone down with US government debt rates. , and the outlook for interest rates suggests further relief after the Federal Reserve lowered interest rates last month, indicating they could cut again this year, depending on data.
This week, US 30-year government yields fell to a record low of 2 percent, while the 1
The 30-year fixed mortgage rate has fallen to 3.60 percent from a 4.94 percent peak in Nove mber, according to mortgage lender Freddie Mac. Mortgage rates are often tied to the benchmark portfolio of 10-year rates.
Strategists said that it may be beneficial for the home builders and the housing market, which has struggled due to land and labor shortages.
A report on Friday showed the US home construction fell for a third straight month in July amid a sharp decline in multi-family housing construction, though the data showed a positive sign for housing: a jump in permits to a 7-month high.
Next week, the US Department of Commerce will release data on the sale of new homes in July.
Housing and home construction stocks should continue to do well as long as prices remain low, but the potential for slower demand is a risk, says Michael James, chief executive of equity trading at Wedbush Securities in Los Angeles. "Lower interest rates lead to lower mortgage rates (which) leads to increased demand for home builders," he said. "You are addressing it with potential concerns that if a recession comes, even if prices are at historically low levels, demand will eventually be reduced."
Eric Marshall, portfolio manager at Hodges Capital Management in Dallas, has seen relatively good traction in housing even with the turbulent markets. Lower prices are a plus, he said, along with unemployment at the lowest level this year.
"Consumer savings have come up, household formation continues to grow faster than housing supply," Marshall said. "And I think that all the things that come together provide a more stable environment for the listed housing stock."
Recent results from some of the best home builders were generally stronger than analysts had expected, but some forecasts disappointed investors, highlighting persistent problems in the housing market.
Last month, PulteGroup Inc forecasted full-year sales and gross margins below analysts' expectations, citing rising land costs, while Lennar Corp in June projected current-quarter revenue under Wall Street estimates and noted uncertainty triggered by the US-China trade war.
Multiples for some of the home builder shares have jumped this year, but many remain below long-term averages. S&P 500 Home Building Index, which includes PulteGroup, D.R. Horton and Lennar are trading at about 9.5 times future earnings, up from about 7 at the start of the year, but well below a long-term average of 14.6, based on Refinitive data.
Wedbush analysts in a research note on Thursday said that builders have reduced square feet as mortgage rates have gone down, which has addressed reasonable price issues. The company has a bullish bias on stocks in home builds, with a "better result" rating on William Lyon Homes, Beazer Homes USA, Lennar et al.
Investors will be watching closely for comments from Fed Chairman Jerome Powell, who will give a speech on interest rates and policy at the annual political symposium in Jackson Hole, Wyoming.
"The fact that the Fed has moved to a more unusual position suggests that these rates should remain relatively low compared to that … we saw in late 2018," said Robert Dietz, chief economist for the National Association of Home Builders .Jerome Powell, who is set to give a speech on politics and politics at the annual political symposium for Jackson Hole, Wyoming.
"The fact that the Fed has moved to a more uncomfortable position suggests that these prices should remain relatively low compared to what we saw in late 2018," said Robert Dietz, chief economist for the National Association of Home Builders.