Momentum Rises as NYAD Makes Another New High. Is a Price War Ahead in Housing?

September 1, 2024

It’s hard to argue with daily new highs on the New York Stock Exchange Advance Decline line (NYAD).

The uptrend for stocks remains intact, even as the economic data remains mixed.  But Wall Street is in heavy rotation mode, during an overbought market, albeit with a few twists.  Thus, given that September is traditionally an off month for stocks, we may see some churning in the near term.  For one thing, it looks as if Nvidia (NVDA) is no longer enviable after its less than robust prediction about its future, while other, less glamorous areas of the market are holding their own

Until proven otherwise, the bull market continues, with the potential for lots of backing and filling.  Indeed, money continues to move into some stocks, while there are plenty of developments to keep an eye on, as the economic data remains mixed.

GDP was revised higher (3% growth) – based on a rise in personal spending.  That seems fishy given what low end retailers are saying during earnings calls.  The Fed’s favorite indicator, the PCE deflator came in as expected (0.2%).  Yet, the low end of consumer spending is crashing.  Just ask discount retailers Dollar General (DG) and Five Below (FIVE).  Even more concerning are the rumors about Big Lots (BIG) considering bankruptcy, while the housing market is on the verge of a big decision. 

As the price chart shows, Big Lots, well it “ain’t” so big anymore.

Next week we get the barrage of employment data, ADP Private payrolls, the JOLTs job opening numbers, and the August Non-Farm Payrolls. 

Where the economy and the markets come together is in the relationship between housing stocks and the physical housing market.  Remember housing accounts for 16% of GDP, while technology accounts for 8%.  So, in this issue, I get granular about its shifting status focusing on the potential repercussions of competition between residential REITs and homebuilders.

To Rent or to Own – It’s All  About that Monthly Payment

Mortgage rates hit a new cycle low last week.  Yet, the latest pending home sales data (down 5.5% month over month) suggest a flat at best future for sales.  Of course, it’s possible that a Fed rate cut may change things for the better.  Yet a deep look into the market provides a glimpse into the present; it’s all about the monthly payment.

There are three reasons for the current ups and downs of the housing market:

• Consumers in some segments are struggling;
• Interest rates and home prices remain higher than people want; and
• Rental prices are coming down.

It’s that third bullet that has become more prominent in the last couple of weeks.  As I recently wrote:

“An existing home, which I’ve been watching for the past few months (built in 2023) failed to sell, even after significant price reductions).  The owner changed strategies and put it on the rental market.  It looks as if he’s got a tenant now – within three weeks of his change of heart. What’s interesting is that his asking rental price may be some $400 lower than what the potential mortgage payment would have been.”

It seems clear that for many, the choice between owning and renting is all about that monthly payment, which sets up an interesting potential decision point for homebuilders, landlords (public and private) and investors.

Homebuilders Vs. REITs – Margins and Availability

Publicly traded homebuilders have been in the driver’s seat for the past several years. By controlling the supply of available homes, they continue to run profitable businesses even during periods of lower sales because they can maximize their margins. It’s a simple equation. If you build a home for $194,000 and sell it for $595,000, you’re hitting a margin home run.

The problem is that even though homebuilders are not losing any ground, and may not lose any significant advantage in the future, they do have some competition now as residential REITs and even private landlords are willing to cut prices to land tenants, while new apartments are being built tilting the supply equation.  This new development, along with the perception, from the public and builders that interest rates remain too high may be keeping the shares in the homebuilder sector in a consolidation pattern.

The iShares U.S. Home Construction ETF (ITB), remains in a consolidation pattern after its recent move up.  There is no reason for alarm in this sector of housing. But a consolidation is to be expected.

The iShares U.S. Real Estate ETF (IYR) on the other hand, is on the verge of a breakout, confirming what I noted above – rental companies are getting the nod for now.

It’s All About Demographics and Price

But here’s the thing.  The population shifts continue.  Supply for single family homes remains tight and apartment supply is increasing.  Yet, as the economy shifts (to whatever it’s going just before and after the election) it’s all about price. 

And right now, the landlords seem to be getting a foothold.  Remember, most rental agreements specify 6-12 months.  That means that the number of people which sign contracts now, will decrease the buyer pool for homes during that period.  Thus, the decrease in pending home sales may just be getting started.

What’s most impressive is that this slowing in pending sales, which goes along with a slowing in both new home and existing home sales of late, is happening during a period when mortgage rates are dropping like a stone (see below).

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Bond Yields Are Flat as Mortgage Rates Make New Lows

The U.S. Ten Year note yield (TNX) remains in a bullish consolidation pattern, holding below 4%. And while this is bullish for stocks in general, the Fed’s recent bullish pivot toward lower rates makes it a very bullish development for the housing market; which accounts for 16% of GDP.

Mortgage rates are in bullish territory as well, below 7% for the twelfth straight week.  Moreover, they remained below 6.5% for 30-year conventional loans.  I’ll be watching for an increase in activity on the ground.

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AD Line Makes New High

The New York Stock Exchange Advance Decline line (NYAD) continues to make new highs but is approaching an overbought level as the RSI hovers just below 70. This suggests the market may cool off in the short term, especially ahead of upcoming data and the FOMC meeting.  The 20-day moving average is the first support to monitor.

The Nasdaq 100 Index (NDX) is consolidating near its 50-day moving average. This could last a while. A move above 20,000 would confirm a continuation of the uptrend. The 20-day moving average is the first major support to keep an eye on.

The S&P 500 (SPX) is in better shape, and within reach of a breakout, with the 5675-5700 area offering some resistance.  Keep an eye on the 20 and 50-day moving averages.

VIX is Settling Down

The CBOE Volatility Index (VIX), is consolidating between 15 and 16.  A bit of sideways action here would be very comforting.

VIX rises when traders buy large volumes of put options.  Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower.  A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy stock index futures raising the odds of higher stock prices.

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Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books.

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