The Housing Industry Just Cried 'Uncle'

U.S. real estate professionals have had enough...

Interest rates have soared since last March. Housing affordability is down. And two weeks ago, according to the Mortgage Bankers Association, mortgage applications hit their lowest weekly levels since 1996.

And now, the big guys are trying to do something about it.

Three professional groups – the Mortgage Bankers Association, National Association of Realtors, and National Association of Home Builders – published an unusual joint open letter to Federal Reserve Chairman Jerome Powell.

The letter came out last week. In it, these groups begged for relief from rate hikes...

The speed and magnitude of these rate increases, and resulting dislocation in our industry, is painful and unprecedented in the absence of larger economic turmoil.

This shows how bad sentiment has gotten in real estate. And the stock market has taken notice...

Folks have sold out of real estate stocks. However, the bearishness in the sector is starting to look overdone.

Two recent signals suggest the pessimism is likely about as bad as it can get. And that could spell opportunity for investors...

It's no wonder real estate pros are feeling vulnerable.

Real estate stocks crashed 16% this year after peaking in February. For comparison, the broader market is up 4% over the same period.

That's major underperformance. And it has pushed real estate stocks into two separate oversold conditions...

We can see the first one by looking at the Real Estate Select Sector SPDR Fund (XLRE). This exchange-traded fund holds a basket of real estate stocks. It's a good way to gauge what the broad sector is doing.

Specifically, we want to look at the fund's relative strength index ("RSI"). This metric tells us when investors are getting carried away in either direction...

If investors buy an asset too fast, the RSI will rise above 70. That means the asset is "overbought." By contrast, if they sell off too quickly, the RSI will drop below 30. That's an "oversold" reading. In either case, a reversal tends to follow.

It's bullish for an asset to enter oversold territory and then rise out of it. And that's exactly what XLRE did earlier this month. Take a look...

Importantly, XLRE tends to rally after oversold RSI levels. We last saw similar readings in 2022. The fund went on to climb 19% to its February peak.

This isn't the only positive sign for real estate stocks today. The second comes from the real estate sector's bullish percent index ("BPI")...

This indicator tells us what percentage of stocks in a given sector are trending higher. Like the RSI, the BPI generates signals when the market overplays its hand...

When the percentage of stocks in an uptrend rises above 70, it's an overbought signal. And when the percentage of stocks in an uptrend falls below 30, it's an oversold signal.

For this, we'll look at the S&P 500 Real Estate Index. Its BPI plunged to 6.5 – a new one-year low – at the start of October. Take a look...

The real estate sector's breadth got clobbered after peaking in July. But it's already starting to reverse... which means a turnaround is likely underway.

These two signals are giving us a critical piece of information about sentiment. It's the same thing we're seeing in the letter from the pros... capitulation.

The leaders of the real estate industry are crying "uncle." And investors are doing the same.

Pay close attention to real estate stocks in the coming weeks. The fear in the sector is likely to wash out soon... These signals suggest the short-term bottom is in.

Good investing,

Sean Michael Cummings

Further Reading

With mortgage rates at historic highs, American homeowners have a major incentive not to sell. But U.S. housing is aging. Folks still want their homes to be safe and modernized. And that means a multiyear boom is possible for a specific subgroup of stocks... Get the full story here.

"We have a secular trend that's hugely in favor of homebuilders," Brett Eversole writes. These are the companies working to fix the housing shortage. Yet investors have been giving up on the sector for months. Here's why this could be another contrarian signal... Read more here.

Market Notes



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