By Paul R. La Monica

The resilient labor market might be just a tad too strong for would-be home buyers -- and investors in building stocks.

The yield on the 10-year Treasury, which influences the direction of mortgage rates, rose Friday after the stronger-than-expected jobs report and is now hovering above 4.75%. That could push the rate for a 30-year fixed mortgage above 7%. And that would be bad news for the shares of already struggling home builders and other housing-related stocks.

The iShares U.S. Home Construction exchange-traded fund, which has big positions in builders D.R. Horton, Lennar, NVR, and PulteGroup, fell 1.5% Friday and has tumbled nearly 20% in the past three months. And the SPDR S&P Homebuilders ETF, which has big weighting in retailers Williams-Sonoma, Home Depot, and Lowe's -- as well as HVAC giants Lennox International and Carrier Global, -- dipped 1.6% Friday and is down about 15% over the same time frame.

Hopes for a rebound in housing have been dashed by the big spike in long-term rates, despite the Federal Reserve's recent string of interest-rate cuts. The problem is affordability. Home prices have continued to rise but now that mortgage rates have skyrocketed as well, that makes it more difficult for both buyers and sellers. Many would-be homeowners can't afford to purchase a home, and sellers (who presumably have to buy a new house at a higher mortgage rate) may feel trapped as well.

"The good news for consumers is that fears of a recession have evaporated, but the bad news is that mortgage rates are probably going to be higher for a longer period," said Jim Baird, chief investment officer with Plante Moran Financial Advisors.

"Potential buyers that have been holding out for lower rates like those from the past decade could be waiting for a while," Baird said. He added that the long-term solution is for builders to build more affordable new homes, but that there's little incentive to do that now given the current rate environment.

Making matters worse, the Fed may now look to pause (as opposed to cutting rates further) until there are more signs of a weaker job market and cooling inflation.

Phil Orlando, chief market strategist with Federated Hermès, said the next stop for the 10-year Treasury yield might be 5%, which would make matters even worse for the housing market and builder stocks.

"This is the worst affordability level for housing in pretty much 40 years," Orlando said. "Sellers are stuck until we get lower rates. So we're kind of at a stalemate."

There are some possibly encouraging signs, though. Many housing-related stocks are relatively cheap, with both the iShares and S&P builder ETFs trading at around 12 times earnings estimates for this year. That's below their five-year highs.

But Todd Walsh, CEO and chief technical analyst at Alpha Cubed Investments, also noted that the two housing ETFs are trading below their 50-day and 100-day moving averages. There could be more downside ahead.

Walsh said investors should keep a close eye on the SPDR S&P Homebuilders ETF, which has fallen from a recent high of around $125 to about $102. He says if the ETF falls much below $100 -- which he describes as a line in the sand level for the ETF -- "that will trigger a longer term technical sell signal unless and until it reverses."

Walsh also predicts the 10-year Treasury yield will continue to drift higher, a "measured move" that should push it up to about 5% in the short term. That's another bearish sign for the builder stocks for the foreseeable future.

"The best course is to be cautious here and let this move play out before trying to jump in and catch any bottom," Walsh said.

Builders are concerned as well. Lennar, which reported its latest earnings last month, noted that it's harder now for many buyers to save for a down payment and qualify for a loan.

KB Home, another top builder, will report its latest earnings on Monday, Jan. 13. Investors will be watching those results closely for further guidance about the housing market -- and whether or not a bottom is finally approaching, or if there's a lot more downside ahead.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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January 10, 2025 14:28 ET (19:28 GMT)

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