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Last Week’s Housing Starts Came In Stronger than Expected

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Dec. 4 2020, Updated 10:52 a.m. ET

Week in review

Last week we had some stronger-than-expected economic data with housing starts and building permits topping 1.1 million. These were the highest numbers since the financial crisis began. That said, 1.1 million starts is about 27% below the long-term average of 1.5 million. The FOMC minutes were released as well. The only revelation was that only a few members would consider hiking rates in June. Finally, inflation came in a bit hotter than expected.

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Implications for mortgage REITs

Bond yields ended the week up 7 basis points. However, there was incredible volatility during the week, as the ten-year bond hit 2.29%. This was bad news for mortgage REITs, particularly agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). REITs exposed to adjustable-rate mortgages, like MFA Financial (MFA), are a little more insulated from interest rate moves. We heard from Annaly Capital recently. Its book value decreased slightly, as the company weathered bond market volatility as well as you could expect.

Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).

Implications for homebuilders

The strong housing starts could mean that housing is turning the corner. Homebuilders like Lennar (LEN) have hoped for a good 2015. Labor could be an issue, as the JOLTs job openings report showed that construction hiring continues. We heard on homebuilder earnings calls that skilled labor is difficult to find. Investors interested in trading the homebuilding sector as an ETF should look at the S&P SPDR Homebuilder ETF (XHB).

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