Home builders. Lots to say here. With the market volatility and things moving quickly, let’s cover the basics. The biggest fundamental backdrop has been post-Covid supply chain and higher rates. It is no secret that median home prices are still high, while the cost of doing business and construction have drastically increased. The result? Less permits, less housing starts and less willingness to commit capital to a negative carry, while money markets are yielding the highest rates in decades. That is the gist.
Now there have been spurts of outperformance across the homebuilding sector, most notably late last summer, it has always been about rates. My latest technical piece on government bonds was bullish, and we saw just how bond prices ran higher despite a hot CPI and PPI reads last month. The culprit I hypothesized was AI deflation at the time. Perhaps that may have been a part of it. However, stagflation became the main theme this week. Bonds continued to rise and homebuilders got crushed.
This administration has made it clear that they are willing to take some short-term pain for the broader goals. This is not the same version of Trump 1.0, who seemed to take the shorter term market movements with jest and as a report card. Perhaps Bessant is the culprit for that behind the scenes.
Nevertheless, its becoming clear that the higher time frame setup here is trying to figure out just how far the rubber band can be stretched in allowing pain until QE comes back in.
On the DeMark side for the housing sector, I see some short-term exhaustion as of today. The problem is the bonds have a short-term sell signal along with volatility as well. Effectively, if the correlation between treasuries and homebuilders is still in play here, this may have been just a correction in larger trend lower. We should expect this dynamic until there is real guidance from the Fed. My suspicion is this sort of tug and pull is not sustainable or helpful, so it will be short lived.
