US Mortgage Rates Top 7%, Signaling Potential Buying Opportunity for 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 closed near a four-month low, having fallen approximately 8.8% in the past month and 21.2% over the last year, trading about 23% below its peak. This downturn is primarily driven by the bond market, specifically the rise in U.S. ten-year Treasury yields, which climbed to their highest level since late October 2023, nearing 5%. Mortgage rates closely mirror these Treasury yields, creating a ripple effect across the housing sector.

The demand side is already showing signs of weakness, with existing home sales in August falling more than anticipated and the last two weeks of the month marking the slowest period for the U.S. housing market in years. Analysts are drawing attention to the current valuation of homebuilders, noting that the median builder in the small-cap group is trading below 0.8 times its book value. This suggests the market is valuing these companies at less than the 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 often occurs 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 direct comparisons to historical data challenging. Additionally, the validity of this valuation metric depends on the underlying asset value; in a severe recession, falling inventory values could render seemingly cheap multiples a trap, as seen in 2008. The indicator is most reliable when a slowdown is interest-rate driven, not caused by a demand collapse or oversupply.

For Israeli savers, this situation has indirect relevance as these companies are part of global stock indices where pension funds are invested. However, applying the same valuation metric in Israel is difficult because land assets are recorded at historical cost, not market value, altering the stock-to-book value ratio's meaning. The immediate future hinges on the Federal Reserve's upcoming interest rate decision and its accompanying forecasts, which will determine whether ten-year Treasury yields continue to rise, further pressuring the housing sector, or retreat, making current valuations more attractive.