Builder Stocks’ Rally Ignores This Worrying Sign, One Analyst Says

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Builder stocks have rallied on the prospect of Federal Reserve rate cuts, but it may not last, one analyst said. And indeed the group was heading lower Tuesday.

This year’s housing market, much like 2024 and 2023, has been anemic as buying costs cause both homeowners and first-timers to stay put. Yet builders have rallied in recent weeks on lower mortgage rates and hopes for future Fed interest rate cuts. The iShares U.S. Home Construction exchange-traded fund, which tracks builders and related industries, was up about 20% since the end of July as of Monday’s close.

But the rally ignores a worrying sign about housing, wrote Rosenberg Research founder David Rosenberg on Tuesday: lumber futures, which have dropped nearly 20% this month. “This is important because it is a leading indicator for the housing sector,” he wrote. “Consider this to be a canary in the coal mine for this rally in the homebuilding stocks and for the broad economy in general.”

Investors appeared to be taking the warning to heart on Tuesday morning. The iShares ETF was down 3.1% in midmorning trading, a steeper decline than the S&P’s roughly 0.1% drop. Concerns about a weaker job market, coupled with a rise in the 10-year Treasury yield, may have also contributed.

Homebuying activity stagnated in the years following the pandemic boom as home prices soared, followed by mortgage rates. Prices nationally are over 50% higher than they were at the end of 2019, according to Case-Shiller home price index data, while 30-year fixed mortgage rates, at a recent 6.5% according to Freddie Mac, are nearly three percentage points higher.

Mortgage rates have retreated in recent days following soft economic data, Mortgage News Daily readings show—but, even if buyers come back, builders are facing supply-side headwinds.

“It seems lost on some folks that the gap between the unsold inventory and new home sales has ballooned to over 15 percentage points […] and that the unsold backlog of homes for sale has topped nine months’ supply in each of the past three months,” Rosenberg wrote, adding that both median and average new home sale prices are lower than year-ago levels by over 5%.

Investors should keep their eyes on a spate of coming data and commentary coming from builders. The National Association of Home Builders will release its September builder confidence reading on Sept. 16. The index in August was tied with June’s reading for the lowest level since late 2022.

Investors can also expect earnings and commentary from Lennar, a large home builder that is set to report third-quarter results after the market closes on Sept. 18, and discuss them on a conference call the following morning.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com