The housing market has slumped in recent years but could blossom in the new decade, with the rapid decline in bond yields translating into cheaper fixed- and adjustable-rate mortgages. According to industry research firm Bankrate, the 30-year fixed-rate mortgage has fallen from 4.30% on May 1 to 3.81% this week, a decline of about 12%. In turn, another batch of millennials should finally have the income needed to qualify for first-time home purchases.

In addition, many current homeowners have now crossed the threshold needed to make refinancing a viable option, adding an additional stimulus for the U.S. economic expansion, which many analysts now predict is coming to an end. Finally, let's not forget the heavy weight of high-interest student loans and revolving debt that can also be cashed in for cheaper alternatives, adding another group that may be able to buy homes.

Chart showing the performance of the iShares Dow Jones US Home Construction Index Fund ETF (ITB)

The iShares Dow Jones U.S. Home Construction Index Fund ETF (ITB) came public in the upper $40s in May 2006, at the height of the real estate bubble, and entered an immediate downtrend that found support in the low $30s a few months later. It broke that level in 2007, entering a historic decline that ended in the single digits in 2009, ahead of a three-wave recovery that topped out just two points below the 2006 peak in January 2018.

It has been tough sledding for the sector since that time, with a two-wave downtrend posting a two-year low in December, followed by a modest bounce that has just reached the .618 Fibonacci retracement level near $40. This marks a common reversal point, so positive price action, including a strong uptick through resistance, may indicate a bullish change of heart that rewards early-to-the party shareholders. 

Even so, bottom fishing has been nearly non-existent since August 2018, with the on-balance volume (OBV) accumulation-distribution indicator stalling at a lower high in February 2019 and grinding sideways through the third quarter. In light of this broad-based apathy, it's clear that major skepticism abounds and that a string of strong monthly home sales may be needed to reawaken optimism.

Chart showing the share price performance of Toll Brothers, Inc. (TOL)

East coast builder Toll Brothers, Inc. (TOL) will offer bird's eye view of industry conditions when it reports fiscal third quarter earnings on Tuesday evening. This well-managed company reported a healthy 7.3% year-over-year revenue increase in May's second quarter report. While it's too early to analyze long-term trends, it will be interesting to see if Toll Brothers' executive team has grown more optimistic about new home sales, given collapsing yields.

A choppy two-legged uptrend stalled within six points of 2005's all-time high at $58.67 in January 2018, giving way to a channeled downtrend that finally ended at a two-year low in October. The weak bounce into April 2019 failed to reach the sell-off's midpoint, yielding limp price action that has drawn a potential head and shoulders topping pattern with a neckline at $34.75. A breakdown after earnings could affect the entire sector.

The market's post-news reaction will also offer insight about current investor sentiment after the weak first quarter recovery effort. May's upbeat report did little to attract buying interest, with the stock now trading near a five-month low, but west coast builders have posted stronger gains than their east coast rivals so far in 2019. In turn, this indicates that local conditions are playing a big role in relative performance.

The Bottom Line

The housing market may be in the early stages of a multi-year recovery that lifts homebuilding stocks into new bull markets.

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