While the markets rose to the beginning of the New Year Monday, homebuilding fell. The iShares US Home Construction ETFIt lost 2.9% Monday, the worst day since September 30, its lowest point since that date.^ThIt fell to 2.89%. 

This was due in large part to an increase in yields on the U.S. Treasury’s 10-year note, which is used loosely for mortgage rates. Investors seemed to ignore the micron variation and pull out from the relative safety of bond markets. This caused builders to become the outliers during the stock rally. 

Builder stocks were up on Tuesday with investors betting that there will be a demand for housing despite the decline in affordability. In midday trading, the homebuilder ETF rose just 1%.

Higher gains were seen in some of the largest stocks within the sector. PulteGroupMidday trading saw a 1.5% increase Toll Brothers shares jumped 1.6%.

“We are still in the camp that believes affordability is actually NOT stretched yet (at least by historical standards) – and we see more outsized home price gains ahead in 2022,” said Buck Horne, a homebuilder analyst with Raymond James.

Horne admitted that there are “a lot of investors we talked to that are still sceptical about the group due affordability concerns.” Rate swings like the one we witnessed Monday only exacerbated those concerns. 

Homebuilders are the darlings in the pandemic. The housing market has seen a sudden boom. ITB saw a 48.6% increase in 2021. It was the third year of positive results and the best performance since 2017. 

CoreLogic has released a revised report that shows November’s home price increases were 18.1% year-over-year. This is actually an increase of 18.1% in annual gains over October (18.0%). Some markets like Phoenix, Las Vegas, and San Diego have seen record-breaking annual gains of 30.5% to 24.1%, respectively. 

Frank Martell (CEO CoreLogic) stated, “Over the last year we have seen one the most robust sellers’ markets in a generation.” While increased interest rates might slow down homebuying, CoreLogic expects 2022 will be another year of strong price growth and continued upward momentum.   

The National Association of Realtors reported that November’s Pending Home Sales, as measured by the signing of contracts, fell slightly. But the Realtors blamed the low supply for the decrease, rather than the high prices. 

“While I expect neither a price reduction, nor another year of record-pace price gains, the market will see more inventory in 2022 and that will help some consumers with affordability,” said Lawrence Yun, chief economist for the NAR. 

According to ATTOM (an analytics and real estate data firm), median-priced single family homes in 2021 were more affordable than historical averages. The figure is up from only 39% of the nation’s previously less affordable counties during the fourth quarter. This was the highest in 13 years. 

Although most analysts believe the housing market overall is affordable, wage growth, and recent increases in the savings rate have meant that income is increasing rapidly for housing. Lenders will eventually be less inclined to approve loans for borrowers whose debt-to income ratios become too high. 

Todd Teta is chief product officer at ATTOM. He stated, “The average wage earner in America can afford the standard home, but it’s becoming increasingly difficult to live comfortably as mortgage rates rise and home prices go up.”