Why It May Be Time to Walk Away from the Housing Sector

I’m sure you are not surprised to see the housing market continuing to move lower. After several strong years of recovery in the housing market, during which home prices rose and home starts and building permits moved higher, we are now facing some hesitancy in the housing market.

As many of you know, the housing market has been propped up and driven by the Federal Reserve’s quantitative easing policies. But with the easy money eventually drawing to a close, we are seeing some heightened fragility on the charts.

The reality is that mortgage rates are continuing to rise, which we know is counterproductive to any recovery in the housing market. The rate on a 30-year mortgage now sits at 4.8%, according to the Mortgage Bankers Association (MBA). Moreover, with the Fed looking at paring down its bond purchases, more upward pressure will be placed on bond yields and mortgage rates.

And you know what happens when mortgage rates rise: they kill the recovery in the housing market.

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The MBA also said that the higher rates have resulted in a decline in mortgage applications for the third straight week.

The steady rise in housing starts and building permits appears to be flattening as rates rise, and developers see demand potentially declining on the horizon.

Take a look at the chart below of the S&P 500 Homebuilders Index. Notice the bearish descending triangle on the chart since the index’s peak in May. We have seen lower highs and lower lows capped by the recent breakdown at the support level, as shown by the horizontal blue line in the chart below.

Chart courtesy of www.StockCharts.com

 As I have said, the easy money in housing has been made, so it’s probably time to move on.

Pending home sales for July saw a decline of 1.3%, which was worse than the one-percent decline estimated by Briefing.com and the 0.4% decline in June.

New-home sales have also weakened, with 394,000 new homes sold in July, down from the Briefing.com estimate of 475,000 and the 497,000 reading in June.

My view is that as mortgage rates rise—and interest rates eventually join them—the housing market will be vulnerable. I would probably be more inclined to buy physical housing investments than housing stocks.

The bottom line: don’t get caught when the housing market begins to turn lower. I would look elsewhere for opportunities at this time, as the housing market is no longer “home sweet home” for investors.

One area that I like is the home renovation sector, which includes such stocks as The Home Depot, Inc. HD and Lowes Companies, Inc. LOW.

This article Why It May Be Time to Walk Away from the Housing Sector was originally published at Investment Contrarians