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Yields Head Lower on Weaker-than-Expected Housing Data

This article was originally published on ETFTrends.com.

The yields on benchmark Treasury notes headed lower Wednesday as the Commerce Department reported weaker-than-expected new home sales, which dropped by 5.5% during September--its lowest level since 2016.

The 10-year note went down to 3.124, while the 30-year note was at 3.341 as of 12:30 p.m. ET. The 5-year note fell to 2.964 as the 2-year note ticked down to 2.859.

The drop in yields come as volatility is roiling the major U.S. indexes with sell-offs in sectors like technology continuing amid a week of third-quarter earnings reports.

"Anyone watching home builder stocks or watching the data all year should not be surprised but its's clear this important area of the US economy, highly sensitive to price and rates, has obviously slowed sharply," said Peter Boockvar, chief investment officer for the Bleakley Advisory Group.

Related: Senior Loan ETFs Bolstered by Solid Economic Numbers

Housing Starts Fall

The new home sales data comes as housing starts also fell more than expected, sliding by 5.3% to a seasonally adjusted annual rate of 1.201 million units last month, according to the Commerce Department. The fall nailed homebuilder ETFs like the iShares US Home Construction ETF (ITB) , SPDR S&P Homebuilders ETF (XHB) and the Invesco Dynamic Building & Construction ETF (PKB) .

“Contractors are paying more for the materials they use and workers they employ but aren’t able to pass most of those new costs on to their clients,” said Ken Simonson, chief economist for the group, the Associated General Contractors of America.

Partly to blame for the rise in building materials is the tariff battle between the United States and China, which has increased the cost of homebuilding. Tariffs have elevated the costs of construction--materials like lumber, steel and aluminum as well as U.S. tariffs on $200 billion in Chinese imports like countertops and furniture could increase construction costs 20% to 30%.

“We’re all going to pay the price for it in terms of higher construction costs,” said Alan Banks, president of the North Carolina Home Builders Association.

In addition, existing homeowners wishing to perform renovations will also feel the proverbial pain in their pockets. As such, they will seek ways to curb costs or even abandon plans for renovations altogether.

Despite the extended bull market in U.S. equities, real estate has still been lagging the rest of the capital markets.

“Although the number of permits is still higher than starts, pointing to more activity in coming months, the overall trend in housing has clearly slowed/plateaued/leveled off,” said Jennifer Lee, senior economist for BMO Capital Markets. “In other words, expect less support from residential construction for the broader economy.”

Rising Rates and Affordability

Additionally, rising interest rates have crimped homebuyer enthusiasm in addition to higher real estate prices. With the housing market lagging behind, the Federal Reserve may reassess their rate-hiking policy as another hike is expected in December.

"One thing is for certain, the economy cannot grow at a sustainable 3% pace for long if new home sales continue to tumble," Chris Rupkey, chief financial economist at MUFG, said in a note. "The Fed's rising interest rates may be more harmful for economic growth than they thought, chiefly because of its effect on long-term interest rates and hence mortgage rates."

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