The worst-performing industry for the month of April is the housing stocks sector. This has been fuelled by concerns about potential interest rate hikes. The fears have been heightened over the past few days, particularly following the release of higher-than-expected inflation data, which has crushed all hopes for lower rates.
Mortgage and other lending rates are critical drivers of the real estate industry. Despite a historic increase in interest rates over the past 24 months, the sector has been remarkably resilient.
The nature of housing activity is such that it doesn’t slow as quickly as it can rise. This recent downturn in real estate stocks could indicate the long-anticipated weakness in the actual housing market.
Higher Mortgage Rates
A key factor contributing to investors’ disinterest in the housing sector is the potential for even higher mortgage rates. Following this week’s inflation data report, the 10-year Treasury yield, a benchmark banks use to set mortgage rates, saw a significant increase. As mortgage interest is a substantial cost factor for most homebuyers, rising rates could severely impact the ability to sell homes. Recent economic data have shown a decrease in applications for home purchase loans, indicating that higher borrowing costs are causing buyers to pull back and refuse to pay more.
Housing Remains Strong Despite Higher Rates
Housing has remained surprisingly strong despite increasing mortgage costs. Historically, housing costs are slow to decelerate compared to other inflation factors.
This resilience is reflected in the recent data from Redfin, a popular industry index that tracks shelter (housing-related expenses). Redfin reported a 0.4% increase in March from the previous month and a 5.7% increase from the year prior.
This contributed significantly to the unexpectedly high CPI inflation report this week. Shelter and gasoline together accounted for more than half of the monthly CPI increase, according to the Bureau of Labor Statistics, which compiles the data.
Investors Exit Real Estate Stocks
The combination of rising rates and a sluggish housing market has caused investors to exit real estate stocks. Following the inflation report, the S&P Real Estate Index (NYSE:XLRE) experienced its worst day since mid-2022, with a loss of 4.11%.
This sell-off reflects a growing belief among investors that the environment for housing stocks is unlikely to improve in the near future. This is especially true with no prospects for rate cuts and potentially stagnant housing prices
The TipRanks Price and Analysis chart shows that the S&P Real Estate Sector Index endured a sudden exodus of investors from the sector between the end of April 9 and the beginning of April 10.
In summary, housing stocks seem to have taken a hit in April. Economic reports and speeches by Fed Governors highlighted that inflation hasn’t been controlled and might even worsen. Weakness in housing, expected due to higher rates, has been on the radar for some time. This may be the first sign of capitulation in the housing sector.
