The US housing sector has taken a beating in 2022. Mortgage rates have soared and home prices have tumbled. However, the weaker-than-expected consumer price index reading for October, published on 10 November, sent the entire market soaring, taking the Philadelphia Stock Exchange Housing Sector Index [HGX] with it. The index rose above its 200-day moving average for the first time since 18 January.
It is probably going to be tough for the housing sector's recent rally to last. Mortgage rates are still high and the US Federal Reserve remains committed to keeping monetary policy restrictive for some time to bring inflation rates down – two factors that have weighed on the housing market this year.
Higher mortgage rates have weakened demand among would-be home buyers, sending property prices lower. The S&P CoreLogic Case-Shiller 20-City Composite – a key measure of house prices in major US cities – fell 1.3% in August, one of the most significant month-on-month declines for the index since the housing bubble burst in 2007.
Mortgage rates are at 20-year highs
The HGX index (the orange line in the chart below) rose sharply as mortgage rates (the black line) fell from their 2018 peak. Today, mortgage rates are hundreds of basis points higher than they were in 2018, yet the HGX is also much higher than it was in 2018. The conventional US mortgage rate has risen to over 7% and is now at its highest level in more than 20 years.
Although the HGX index has ticked higher recently, the performance of three of its constituent housing stocks suggest that the index could soon slide once more. The three stocks in question are:
KB Home [KBH]
KB Home has seen its shares rise sharply since the start of October but, unlike the HGX index, KBH fell short of advancing beyond its 200-day moving average, stopping and reversing at it. The stock has hit a downtrend that started at the beginning of May and is now acting as resistance. Also, there is a big gap at lower levels which could act as a magnet at $27.75 should that downtrend and 200-day moving average hold and the equity fail to advance.
PulteGroup stock has a similar-looking chart to that of KB Home. Pulte broke above its 200-day moving average, but has now reached overbought levels as measured by the relative strength index, and is bumping up against a support and resistance zone that goes back to 2021. Meanwhile, a failure to advance beyond $45.50 is likely to result in the shares filling the gap of around $38.60.
Weyerhaeuser, another constituent of the HGX index, has not even come close to its 200-day moving average, but it has risen to a support/resistance region of around $33.50. There is also a downtrend that meets that $33.50 zone which originated at the end of May. If the stock can break above those two challenging levels of technical resistance, then there is a gap to fill up at $34.50. However, a failure to push beyond the downtrend and resistance could result in the shares trading lower to around $30.
Over the next six to 12 months, the direction of travel for the housing sector will depend on monetary policy and inflation. If inflation remains high and the job market remains strong, and the Fed keeps interest rates high, these factors will weigh heavily on the housing market, implying more pain for the sector.
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