Skip to main content

NEW YORK (TheStreet) –A string of negative housing data in July has jeopardized future price gains in iShares Dow Jones US Home Construction (ITB) - Get iShares U.S. Home Construction ETF Report and SPDR S&P Homebuilders (XHB) - Get SPDR S&P Homebuilders ETF Report.

The home construction index is made up mostly of Lennar (LEN) - Get Lennar Corporation Class A Report, DR Horton (DHI) - Get D.R. Horton, Inc. Report, Toll Brothers (TOL) - Get Toll Brothers, Inc. Report, Home Depot (HD) - Get Home Depot, Inc. Report, and Lowe's (LOW) - Get Lowe's Companies, Inc. Report.

Meanwhile, the homebuilder's index is made up of iRobot (IRBT) - Get iRobot Corporation Report, Restoration Hardware Holdings (RH) - Get RH Report, Standard Pacific (SPF) , Williams-Sonoma (WSM) - Get Williams-Sonoma, Inc. Report and Ryland Group (RYL) , with different weightings for both indexes and some overlapping companies.

A custom index created below aggregates economic data on U.S. housing starts, building permits, and new family homes sold, thus favoring trends in the initial construction phase of the housing sector.

The graph shows that since its lows in 2009, the index has rebounded sharply higher, but has largely declined for the past two years. Many analysts have tried to explain the situation away by attributing the trend to poor weather in the first quarter, but considering the length of the present downtrend in the indicator, transitory factors don't look to be in play.

Image placeholder title

Housing data courtesy of St. Louis Federal Reserve

In reality, stagnant wage growth and a spike in 30-year mortgage rates last year from 3.5% to around 4.5% have been the main culprits in the decline in new home activity. As homebuyers have dealt with lower wages to pay for higher mortgages, many have chosen to simply rent as opposed to purchase.

Image placeholder title

TheStreet Recommends

Wages and mortgage rate economic data courtesy of TradingEconomics.com

The economic factors weighing on housing have begun to spill over into equity markets as well. Both the home construction and homebuilder's index are trading near yearly lows this week, and look to have broken major price support, signaling more declines may be in the works.

It is unlikely that mortgage rates significantly drop in the near future, even as long-dated Treasury bonds continue to trend higher. Similarly, issues with economic growth and the true strength of the labor market could hold back demand for new homes.

Ultimately, the new home market looks to be saturated after rebounding sharply from the lows in 2009 to 2012. Fresh demand from millennial home buying could spur more activity in the market, but that seems unlikely for now. Equities with a stake in homebuilding and construction look to be forming major topping patterns and could begin a cyclical bear trend lower as the Federal Reserve prepares to raise interest rates in 2015.


ITB data by YCharts

Image placeholder title

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.