We see parallels to late 2016 when rates increased but housing remained strong 

As interest rates have moved higher in recent months, homebuilding and building products stocks have been under pressure on the investor assumption that demand will soon drop in response to higher mortgage rates. We disagree. The move to date of ~30 bps in the 30 year mortgage rate isn't enough to derail housing's momentum. We lay out 7 arguments why in this report. We think the best comparison to the current period is after the presidential election of 2016 when mortgage rates moved as much a 90 bps in just a few months; however, housing demand remained resilient. Order trends for key homebuilder markets remains positive at up 18% YoY through late February and while this is a slowdown from the 30-50% gains seen in 2H20 it has more to do with difficult comps in January/February 2020 than it does with an underlying slowdown in demand.

Housing's capacity to absorb rate increases isn't infinite; however, we argue it is more resilient than investors are currently pricing in; therefore we reiterate our positive call on homebuilders (top picks DHI, NVR, LGIH) and select building products (FBHS, TREX).

Easing mortgage lending standards the most underappreciated item on our list 

One of the most remarkable aspects of housing's strong performance in 2020 is that it happened as mortgage lending standards tightened sharply. Lending standards could now head the other direction for a sustained period - something that isn't widely understood by investors. The assumption by many investors that the pandemic simply pulled forward demand is also incorrect in our view - demand was already strong heading into the pandemic and our calculations show there was minimal pull forward.

Looking ahead, we have argued previously (link, link) that the pandemic should leave housing demand higher than it was before. Also, higher income consumers that drive most housing transactions have weathered economic turmoil well.

We see risk if the 30-yr mortgage rate increases to 3.3-3.4% from 3.0% currently 

The 10-year yield is up almost 100 bps from its bottom in August; despite this, 30-year mortgage rates are only up ~30 bps from their bottom in late December because mortgage spreads were still compressing back to normal levels during most of 2H20.

Even after their current increase, mortgage rates are still ~60-70 bps below their levels prior to the pandemic. In other words, homebuyers retain 8-9% greater home purchasing power than they had prior to the pandemic. This is more than than the 6-8% increase in home prices we estimate that the pandemic has driven. We see risk to housing beginning if the 30-year mortgage rate increases an incremental 30-40 bps or to the 3.3-3.4% range. This is based on the historical pattern whereby the "danger zone" for housing is when mortgage rates increase enough to impact purchasing power by 7% or more on a sustained (more than 3 month) basis.