Home builders are getting set to construct more units than they have at any time since the recession, based on building permits, but it comes at a curious moment: Mortgage rates are rising faster than they have in years—which means builders are unlikely to get the same prices they would have a year ago.
That may be why gains in home-building stocks were subdued in midday trading. Big builders including D.R. Horton (DHI) Pulte Group (PHM), Lennar (LEN), and Toll Brothers (TOL) were each up less than 2%. The iShares U.S. Home Construction ETF (ITB) was up 1.4%.
Housing starts soared 9.7% to 1.33 million, well ahead of expectations for 1.23 million and last month's count of 1.19 million, according to the Commerce Department. It was the best reading since October 2016. That's still below the average historical rate of 1.5 million new housing starts per year, but it's at least getting closer.
Building permits, an indicator of future growth, soared 7.4% to 1.4 million.
So far, brokers are seeing strong interest from potential buyers.
"Our latest channel checks show Realtors largely expect demand to outpace supply through the selling season despite builders adding inventory," wrote Credit Suisse analyst Susan Maklari.
The problem is that the increase in new supply comes just as mortgage rates start to jump. The average rate on a 30-year fixed rate mortgage hit 4.35%, after starting the year under 4%, according to Bankrate. Further increases would reduce the expected prices of new homes, dissuading homebuyers or leaving builders with lower margins on each sale.