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

U.S. 30-year fixed mortgage rates have surpassed 7% for the first time in over a year, coinciding with a significant drop in homebuilder stocks. The iShares U.S. Home Construction ETF recently closed near a four-month low, having fallen approximately 8.8% in the past month and 21.2% over the last year. This decline places the sector about 23% below its peak.

The primary driver for these stock movements is not the housing market itself, but rather the bond market. The yield on U.S. 10-year Treasury notes climbed to its highest level since late October 2023, reaching 4.976%. Mortgage rates closely mirror this Treasury yield, causing a ripple effect throughout the industry.

Demand is already showing signs of weakness, with existing home sales in August falling more than anticipated. The last two weeks of August were reportedly the weakest for the U.S. housing market in years. Analysts are now pointing to a specific valuation metric: the median homebuilder is trading at less than 0.8 times its book value. This means the market is valuing these companies below the combined worth of their land, homes under construction, and cash reserves.

Historically, when this valuation metric falls below 0.8, the sector has often seen significant outperformance in the subsequent three, six, and twelve months, with average returns of 16%, 36%, and 59% respectively. However, there are caveats. The market doesn't bottom out immediately upon hitting this threshold, and the true low point can occur later. This indicator has appeared twice in less than a year, a pattern previously seen in the mid-1990s, during the 2008 financial crisis, and in 2022, periods that were followed by substantial rallies.

Further considerations include the shrinking pool of publicly traded U.S. homebuilders due to mergers and acquisitions, making historical comparisons less precise. Additionally, the metric's reliability depends on the underlying asset value; in a severe recession, falling inventory and book value could turn a seemingly cheap stock into a trap. The indicator is most effective when a slowdown is driven by interest rates rather than a collapse in demand or oversupply.

For Israeli savers, the impact is twofold: direct exposure through global stock indices held in pension funds, and the principle itself. However, applying this metric directly in Israel is complicated, as land is often recorded at historical cost rather than market value, altering the stock-to-book value ratio.