Earlier this week, shares of Toll Brothers fell sharply amid a broad decline in homebuilders following the latest update on US mortgage rates, which now sit at the highest since late 2018.
The run-up in the average for a 30-year loan comes at a time when home prices remain extraordinarily elevated, a double whammy for would-be buyers.
That conjuncture, alongside imminent Fed MBS runoff, will be challenging for America’s red-hot housing market to digest. Or at least that’s my view.
Read more: US Housing Bubble Tested As Mortgage Rates Go Vertical
The ratio of the XHB ETF to SPY broke below key support a few days ago, and analysts are starting to incorporate the likely read-through of sharply higher mortgage rates.
“With interest rates likely set to rise more than we anticipated under our prior favorable view of homebuilders, we shift to a more defensive posture,” Barclays said Thursday, in the course of cutting PulteGroup and Taylor Morrison to equal weight from overweight.
The figure (above) underscores the simple dynamic at play.
Toll Brothers has fallen every month this year, and the losses aren’t small. The shares fell nearly 19% in January, 8% in February and another 13% last month. Indeed, the stock has managed just three winning weeks in 2022.
Although I generally eschew attempts to simplify complex macro dynamics by way of charts that lack sufficient nuance to support my pretensions to profundity (and do note the self-deprecating humor there), the figure (below) is worth highlighting — at least for a chuckle.
Is that the most important chart in all of macro? No. Probably not. But, in his latest weekly missive, BofA’s Michael Hartnett called it “The Biggest Picture.”
“Big outperformance” from the “retailer to Main Street” versus the “homebuilder to Wall Street” is a “recession signal,” Hartnett said.
Of course, you shouldn’t lose any sleep over Toll Brothers. As Bloomberg noted, summing up the builder’s last quarterly report, “Toll’s wealthy customers are more immune to rising rates because they have higher incomes [and] many are able to pay cash, especially if they had a previous home to sell.”
One thing’s for sure: If the US housing market is a house of cards, it’s an expensive one. As The San Francisco Chronicle detailed last month, “there has been increasing interest in tiny home living” across the Bay Area.
Tiny homes are now a figurative and literal cottage industry. And a booming one at that. The linked article noted that a company called Pacifica Tiny Homes which, as the name suggests, builds and sells tiny homes, is now operating with a six-month backlog.
If you can’t wait that long, there’s Tiny House Listings, a website where you can peruse offerings like the 13’-6” high, 8’-6” wide, 16,600 lbs “home” on wheels shown below.
That “beautiful mix of materials,” as the listing put it, can be yours today for the bargain basement price of $72,000. An actual basement isn’t included, but the trailer, which the listing described as “a custom-built triple axel,” is.
Although that rolling dwelling is (currently) in Texas, the Chronicle’s Annie Vainshtein highlighted a number of such “properties” available in the Bay Area, including a 192-square-foot tiny home in Windsor for $95,000.
Vainshtein, who interviewed the owner of Pacifica Tiny Homes, noted that “people are on their own when it comes to finding a place to live in the tiny home,” but many of the company’s customers have had “luck finding rental spots on Craigslist, finding RV parks that are accepting tiny homes or joining tiny home communities.”
Pacifica, Vainshtein wrote, “handles all of the design and construction,” which means, much like Toll Brothers’ customers, buyers can “customize the models” to their liking. One buyer, who Vainshtein described as “a nurse who worked long hours,” was even able to get a bathtub.
Pffft, bathtub. These millennials are so entitled these days.
The biggest problem with the ‘Tiny House Movement” is that there is nowhere to put all of the stuff that people have been purchasing- therefore, transitioning consumers to, god forbid, possibly readers.
That might be terrible for the US economy. (Haha)
Seriously, $95k for 190 sq ft? People will seemingly fall for anything. My family’s business served the “tiny home” market for decades making windows, doors, hardware and other products for mobile homes (manufactured housing) and RVs. Not really new but I’ll wager today’s so-called are neither as safe or as nice as a typical manufactured home.
If that’s where the market is going competition will take care of that.
If I had one of those, first thing I’d do is fill the pantry with cool stuff…
Something tells me cost per square inch of those things is somehow linked to a depreciation rate but who can say?
Meanwhile, as panic fades and long-term buy the dip mentality braces for opportunities, emerging from the pandemic fog is the cool next thing of mortgage rates pushing higher:
Agency MBS: The Transition to QT Is Here
Jason W. Smith, Portfolio Manager
In our view, the implications of the massive drawdown of the Fed’s presence in the Agency MBS market will be higher mortgage rates (of which we have already seen evidence, with current rates close to 4.25%), production coupon MBS spreads that are wider (and more volatile), and a much more tempered refinancing environment.
Worry not, here comes the 40yr mortgage.
Keep
Keep in mind that the mortgage rate is 2X for a “mobile home”, and the loan term maxes at 15 years. Good luck getting rid of those tiny homes when the mobile home rate is 14%.
I first heard of the “tiny home” movement almost 20 years ago, when the point of it was not to compete with mobile homes but as an alternative/”retort” to the McMansion trend.
Higher mortgage rates with a significant deficit of housing. What could go wrong?
Realistic thoughts from New York Times from a few days ago:
““Higher rates don’t solve any of that,” Mr. Khater said. “It might bring the market a little more in balance — modestly more in balance — but it doesn’t solve the fundamental issue.”
Higher rates, in other words, won’t create more supply. If anything, rising rates across the economy will increase borrowing costs for homebuilders, too, on top of all their other pandemic problems.”