If there’s one thing that investors have learned so far in 2021, it’s that interest rates still matter … a lot.
The rise in 10-year Treasury yields thrashed expensive equities into steep declines. The Nasdaq lost 10% in just 15 days. That’s the eighth-fastest correction in its history.
Now rate fears are spreading to other sectors as well.
Because mortgage rates are rising, there are concerns that the housing market boom could go bust. But those fears are overblown.
While housing stocks have taken a break from their uptrend, there are three key catalysts that will keep homebuying activity and related stocks elevated.
Catalyst No. 1: Mortgage Rates
Yes, it’s true that the average 30-year fixed mortgage rate has gone from 2.65% in the first week of January to 3.05% in the most recent report.
But let me frame that level in a historical context. The chart below ranks mortgage rates by their level since 1971.
The arrow shows the most recently reported mortgage rate, and it’s still in the bottom 2% of all readings over the past 50 years.
While mortgage rates have risen, they are still incredibly low by historical standards.
Catalyst No. 2: Generational Demand
While low rates get a lot of the attention, shifting demographics play an important role in housing demand as well.
That’s because the number of Americans reaching prime household formation age (35 to 44 years old) is on the rise and will continue to swell through the end of the decade.
The chart below comes from homebuilder Lennar (NYSE: LEN). It shows how millennials will increase this key homebuying age group by over 5 million through 2030.
Catalyst No. 3: Valuations Matter
If there’s one thing that rising interest rates brought to the front of investors’ minds, it’s that valuations still matter.
In the mad dash to rotate into cyclical stocks, homebuilders offer an attractive combination: growth at a reasonable price.
Low mortgage rates and demographics support the growth aspect of the industry.
But collectively, homebuilders trade at just 12.3 times the earnings estimates for this year. The S&P 500 Index trades at nearly 24 times. That puts homebuilders at about a 50% valuation discount … the largest in the past decade.
That combination of growth and value is why there’s still an upside for homebuilding stocks . And you can profit from the catalysts outlined here with the iShares US Home Construction ETF (NYSE: ITB).
Best regards,
Research Analyst, The Bauman Letter
P.S. We have also identified three stocks we believe could bring you more than double returns in the next 10 years from the housing market, regardless of whether or not interest and mortgage rates rise. You can read more details about them here.