The Federal Reserve's decision to postpone interest rate hikes until at least 2020 could underpin America's homebuilders in coming months, potentially ending the sector's correction after 14 months of bearish price action. The iShares Barclay's 20+ Year Treasury Bond Fund (TLT) reflects this optimism, lifting to resistance in place since January 2018. A breakout would solidify the deal, unfolding simultaneously with lower mortgage rates.

Governors have finally thrown in the towel, admitting that this economic cycle is defying traditional expectations. Homebuilders struggled after the Fed embarked on an aggressive 2018 interest rate policy designed to curb inflation that was expected to surge in reaction to robust economic growth and low unemployment. However, wages have failed to grow with employment while trade tensions have kept a lid on producer prices, despite the inflationary nature of those policies.

Still, the turnaround carries substantial risks because the Fed could be worried about data that predicts a recession at the start of the new decade. If so, home sales may continue their downward path, even with lower mortgage rates. However, that seems unlikely because plenty of buyers are waiting on the sidelines after failing to qualify for loans at higher rates. The downturn could reverse many of those disqualifications, bringing buying costs in line with family income.

Technical chart showing the share price performance of the iShares Barclay’s 20+ Year Treasury Bond Fund (TLT)
TradingView.com 

The iShares Barclay’s 20+ Year Treasury Bond Fund (TLT) rallied back to the 2008 high at $123.15 in 2011 and broke out one year later, but the uptick failed to generate buying interest. It posted two nominally higher highs into July 2016 and sold off after the November election, entering a shallow downtrend that hit a four-year low at $111.90 in November 2018. The fund bounced back to the 200-week exponential moving average (EMA) at year end and has been testing that level for the past three months.

This price action has now completed an inverse head and shoulders basing pattern that will target the 2017 high near $130 following a breakout. The 30-year fixed mortgage rate has been falling since peaking at 4.94% in November 2018 and could take a leg down to 4.00% in reaction to bullish developments. In turn, that would mark the lowest mortgage rate available to consumers since January 2018.

Technical chart showing the share price performance of the iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB)
TradingView.com

The iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB) came public at $48.62 in May 2006 and entered a steep downtrend in early 2007, posting lower lows into March 2009's all-time low at $6.33. The subsequent recovery wave stalled into the mid-$20s in 2013 and eased into a shallow trajectory, adding just five points into August 2015's high at $29.86. It broke out above that resistance level in March 2017 and posted impressive gains into January 2018, when the fund reversed just three points under the 2006 high.

The subsequent decline found support after piercing the 200-week EMA in December, while the bounce into January marked the fourth successful defense of the moving average since 2013. The first quarter uptick stalled at 200-day EMA resistance in early February, initiating a test that has continued for nearly two months. The fund turned higher on greater-than-average volume after the Fed decision but needs to rally above $26.13 to clear moving average resistance.

Ohio's M/I Homes, Inc. (MHO) and Arizona's Meritage Homes Corporation (MTH) have carved the most bullish price patterns in the sector, with both stocks sitting on top of their 200-day EMAs for the first time in several months. However, MHO has attracted much stronger buying interest than MTH, with accumulation readings holding near the midpoint of the multi-year range. This bodes well for higher prices, but skeptical investors may wish to sit on their hands for now, waiting for an uptick in new home sales before committing capital.

The Bottom Line

The Federal Reserve's decision to put interest rate hikes on hold could generate a resurgence in the homebuilding sector, with a greater share of millennials qualifying for traditional mortgages.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.