Homebuilders are expected to thrive, but are currently facing increased interest rates.
Homebuilders are the sole reason why the inventory shortage is starting to decrease – as more homes get built, more options become available to clients, and more sales get made. It is expected for homebuilders to experience a large gain in revenue throughout the rest of the fiscal year, due to the demand for homes that the market is facing at the moment. However, homebuilders are also expected to face increased interest rates, which may slow the rate of their monetary success.
According to Jared Woodard, an investment strategist at Bank of America Merrill Lynch in New York, “the continued rally in yields is a potential red flag.” The S&P Composite Homebuilding Index has taken a bit of a hit, falling 16.9% from its peak on January 22nd. Last year at this time, the index was thriving, concluding to an overall 74.8% increase from the previous year.
This doesn’t look good for homebuilders. According to Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds in San Francisco, “the factors indicate that there may be some headwinds going forward.” In addition to the decrease on the composite homebuilding index, the yield on the 10-year Treasury note has also increased – which is another bad omen. As higher rates on the yield increase, so do the interest rates. This year alone, the yield temporarily exceeded the 3% mark, making it the highest note since January 2014 and equating to approximately 50 basis points higher than it was last year.
While this may seem like an undesirable sentence for homebuilders, some investors are still predicting shares on homebuilders to outperform all other U.S. stocks. Hopefully this means that the market will take a turn for the better soon, and that homebuilders will be able to comfortably benefit from all their hard work. For now, we can only wait and see.