Kass: Homebuilders May Soon Become Homewreckers

Homebuilders' shares have had a big run off of the April lows.

There is a lot of hot (or performance) money in this small-weighted sector based on the perception that the Trump administration (especially after the aggressive legal tact taken towards firing Fed Governor Lisa Cook and the resignation of Adriana Kugler) will easily gain control of the Federal Reserve and cajole Fed members into a path of much easier money.

The consensus belief is that interest rates will then fall and be housing sector stimulative.

As noted by Rebecca Patterson on CNBC Tuesday, this consensus expectation is probably misunderstood and at a material risk.

While I agree that the Trump administration will likely gain majority control of the Fed, I am fearful that Fed rate cuts will stimulate higher yields in the intermediate and longer-term fixed-income markets — triggering higher mortgage rates in the process.

There is historical precedent for this.

Generally, mortgage rates are tied to the 10-year Treasury note, which I see as moving higher in the months ahead, exacerbated by too-aggressive Fed easing and stubbornly high inflation (which will be boosted by tariff increases going thru the pipeline):

https://www.twitter.com/JasonP138/status/1960395895192563905

Already the 2/10 yield curve is at the steepest since April 2025:

Besides the likelihood of higher, not lower mortgage rates (byproduct of Fed easing), the inventories of unsold homes are moving higher across the country as home prices begin to sputter:

* New Single-Family Home Prices Drop Further as Inventory Glut Grows. In the South, Inventory for Sale Hits New Record | Wolf Street

* Sales of Existing Single-Family Homes Crushed, Supply Highest since 2016. Condo Sales Near Low in the Data, Supply Highest since Housing Bust. Prices Begin to Bend | Wolf Street

* Inventory of Homes for Sale in New York, Philadelphia, Chicago, Boston, Nashville, Atlanta, Washington DC, Columbus, Detroit, Minneapolis | Wolf Street

* The 12 Bigger Cities with the Biggest Price Declines of Single-Family Homes (-10% to -23%) through July | Wolf Street

* Average Age of First-Time Home Buyers and How it Changed over the Past 25 Years | Wolf Street

* Inventory of Homes for Sale Balloons in Texas and its Big Metros: Dallas-Fort Worth, Houston, Austin, San Antonio | Wolf Street

An additional and non-trivial concern is that the recent rise in the CRB Index and building materials which could dampen profit margins.

Bottom Line

https://www.twitter.com/DougKass/status/1960654194030919774

With the administration's politically motivated gain of control of the Federal Reserve producing a central bank soon to be hell bent on lowering the Fed Funds rate — another error in monetary policy seems to lie ahead as the interest rates (10-year Treasuries) tied to mortgage rates likely rise.

Sticky inflation (causing potential homebuilder profit margin erosion) and a rising glut of unsold homes raise formidable headwinds to homebuilder profitability in the year ahead.

After the spectacular rise in the last four months I am shorting homebuilders.

This commentary was orginally posted in Doug's Daily Diary on TheStreet Pro.

At the time of publication, Kass was short DHI (S), KBH (S), GRBK (S), PHM (S).