US Mortgage Rates Top 7%, Signaling Potential Buying Opportunity in Homebuilder Stocks

U.S. mortgage interest rates have surpassed the 7% mark for 30-year fixed mortgages, a level not seen in over a year, impacting the housing market. The average yield on 10-year U.S. Treasury bonds, a key driver of mortgage rates, reached 4.976% this week, its highest since late October 2023. This rise directly translates to higher monthly payments for homebuyers.

Homebuilder stocks have reacted sharply to the increasing borrowing costs. An exchange-traded fund tracking the sector closed Thursday at $88.22, its lowest point since May, marking a 6.8% decline in August. Existing home sales in August fell more than anticipated as mortgage rates approached 7%, with the last two weeks of August described as the weakest in years.

Despite the downturn, a potential buying signal has emerged. Investment firm Evercore noted that the median U.S. homebuilder stock is now trading below 0.80 times its book value, meaning investors are valuing these companies at less than the accounting worth of their assets minus liabilities. Historically, when this median index for small-cap homebuilders has fallen below this threshold, the sector has delivered significant excess returns in the subsequent three months, six months, and year, averaging around 16%, 36%, and 59% respectively.

However, caveats exist. The signal does not guarantee an immediate market bottom, as the sector has historically continued to decline for a period after the threshold is breached. Furthermore, this signal appeared in April as well, and has occurred twice within a year in the past, notably in the mid-1990s, during the 2008-2009 financial crisis, and in 2022. The sample size of small-cap public homebuilders has also shrunk due to mergers and acquisitions, potentially making historical comparisons less stable.

In Israel, the housing market showed a contrasting reaction, with the construction sector ETF rising 1.3% during trading on Friday, reflecting the difference in mortgage structures. Israeli mortgages are primarily linked to the Bank of Israel's key rate (Prime rate), making them more sensitive to domestic monetary policy than U.S. mortgages, which are more closely tied to Treasury bond yields. Nonetheless, the U.S. 10-year Treasury yield serves as a global benchmark, influencing all income-generating assets, including those in Israel.