Higher Mortgage Rates Spark Sharp Decline in Home Constructor Stocks

Home constructor stocks witnessed a sharp decline on Wednesday as concerns over higher mortgage rates loom large. The persistent surge in inflation figures is anticipated to exert upward pressure on mortgage rates in the immediate future, likely dampening housing demand.

Treasury Yield Surge Signals Mortgage Rate Increase

Wednesday’s release of March’s consumer price index spurred a notable rise in mortgage rates, a key financial indicator for homeowners. The 10-year Treasury yield saw a remarkable surge of 0.194 percentage points, reaching 4.559% on Monday, as per Dow Jones Market Data. This surge marked the highest level since mid-November, representing the most substantial single-day increase since September 2022. Dow Jones Market Data reveals how economic changes affect mortgage rates, emphasizing the necessity of staying financially informed.

This surge suggests an impending rise in mortgage rates, a pivotal factor influencing housing expenses. According to Freddie Mac, the average mortgage rate last week stood at 6.82%.

Investor Expectations Dashed, Stocks Take a Hit

The unexpected surge in inflation figures dashed investors’ expectations for a rate cut in June, as reported by Barron’s. This shift in expectations dragged down both the S&P 500 and the Dow Jones Industrial Average, with builders experiencing a more pronounced decline compared to the broader market.

Stocks and ETFs in Decline

Two exchange-traded funds that track the sector, namely the SPDR S&P Homebuilders and iShares U.S. Home Construction, registered declines of 3.4% and 4.3%, respectively. Shares of the four largest constructors by market capitalization—D.R. Horton, Lennar, NVR, and PulteGroup—witnessed declines ranging from 3.5% to 5.7%. Both the S&P and DJIA are down by approximately 1%.

Mortgage Demand on the Decline

The increase in rates has already begun to impact mortgage demand negatively. According to Joel Kan, deputy chief economist at the Mortgage Bankers Association, applications for home purchase loans dwindled to their lowest level since late February last week.

Rising Housing Expenses Fueling Inflation

One of the most persistent components of inflation is housing expenses. The index monitoring shelter costs ascended by 0.4% in March compared to the previous month and surged by 5.7% compared to the previous year. Shelter and gasoline combined accounted for over half of the monthly CPI increase, according to the Bureau of Labor Statistics. “Rapidly rising housing costs, a major factor in inflation, strain budgets and exacerbate economic disparities,” WSJ Print Edition noted.

Rental Market Sees Surge

Shelter is commonly perceived as a lagging indicator—but there are indications that rents are picking up pace again. Redfin reported on Wednesday that the median asking rent in the U.S. stood at $1,987 in March, marking an increase of 0.8% compared to the previous year. The brokerage noted in a report that it was the third consecutive month of increases in this metric.

“Many individuals are postponing their plans to purchase homes because the monthly payments for homebuyers are nearing their record highs,” the report highlighted. “This is bolstering demand for rentals, consequently pushing up rental prices.”