FALLING BOND YIELDS ARE BOOSTING REITS, BUT HAVEN'T HELPED HOMEBUILDERS -- FALLING PRICE OF LUMBER SUGGESTS WANING DEMAND FOR NEW HOMES AND MAY EXPLAIN HOMEBUILDER WEAKNESS
REITS BENEFIT FROM FALLING BOND YIELDS... Previous messages have shown falling bond yields benefiting dividend-paying stocks like utilities. REITS fall under the same category, and are getting the same lift from falling bond yields. The brown bars in Chart 1 show the MSCI US REIT Index ($RMX) trading it the highest level in nine months. Its relative strength ratio (solid area) has been rising since the start of 2014. In other words, REITs have been doing better than the overall stock market. The main reason for that is falling bond yields. A glance at the chart shows an inverse relationship between the REIT Index and the 10-Year T-Note yield over the last sixteen months. An upturn in bond yields last May caused a sharp selloff in REIT stocks (see arrows). Rising yields during the rest of 2013 kept REITs under pressure. REITs have done a lot better since the start of the year, both on an absolute and relative basis. The stronger REIT performance started with an early January peak in yields (see arrows). The reason is that dividend-paying stocks compete with bonds for yield. Rising yields hurt REITS (which happened during most of 2013). Falling bond yields during 2014 have made REITs a lot more attractive. The same hasn't been true of homebuilders.
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Chart 1
FALLING BOND YIELDS AREN'T HELPING HOMEBUILDERS... Falling bond yields this year haven't been much of a help to homebuilding stocks. Chart 2 shows the the spike in bond yields last spring (top of chart) pushing the Dow Jones U.S. Home Construction iShares (ITB) lower. Falling bond yields this year, however, haven't keep homebuilders from falling as well. [Bond yields determine the cost of home mortgages]. The daily price bars show the ITB falling 12% since the start of March (while the S&P 500 was flat). That drop has brought the ITB to a test of chart support at its 200-day moving average (red arrow), and a rising support line starting last August. The ITB/SPX ratio (below chart) has dropped to the lowest level of the year.
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Chart 2
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Chart 3
FALLING LUMBER PRICE MAY BE HURTING HOMEBUILDERS... Problems with homebuilders may have more to do with a drop in demand. Chart 3 shows a close correlation between homebuilders (ITB) and the price of lumber (red line). [Since lumber is the prime material used in building a house, its direction is a barometer of demand for new homes]. Both turned up together in late 2011 and rose throughout 2012. Lumber peaked early in 2013 (red arrow) and forewarned of a correction in homebuilders later that spring. Lumber peaked at the start of 2014 again (second red arrow), and has since fallen to an eight-month low (see circle). That also warned of waning demand and has weighed on homebuilder performance. That's why it's a good idea to watch the price of lumber (as well as interest rates) in determining future homebuilder performance.
