The NAHB Housing Market Index for the United States was expected to be 35 in May. The actual reading was 37.
This result was 2 points above the forecast. The index measures homebuilder sentiment about housing market conditions.
Homebuilder Sentiment Improves
The May NAHB Housing Market Index came in at 37, beating the expected 35. This indicates that while homebuilder confidence remains pessimistic, the outlook is improving faster than anticipated. We see this as a sign that the housing sector may be finding a bottom after the slowdown we experienced through 2025.
This slightly better housing data complicates the outlook for Federal Reserve policy, especially with April’s core CPI still elevated at 3.1%. As 30-year fixed mortgage rates remain sticky around 6.5%, any sign of sector strength could reduce the urgency for the Fed to cut rates. Consequently, we are watching for shifts in the fed funds futures market, which currently prices in a 40% chance of a rate cut by the third quarter.
For derivatives traders, this sets up a potential play on homebuilder ETFs like XHB. Given the mix of a positive surprise against a backdrop of high mortgage rates, implied volatility on these ETFs might increase in the coming weeks. Selling cash-secured puts on major builders could be a viable strategy, as it capitalizes on these elevated premiums while setting a potentially attractive entry point.
This housing resilience also affects interest rate derivatives, particularly options on Treasury note futures. If subsequent data confirms this economic strength, it could push back rate cut expectations, making call options on shorter-term Treasury futures less attractive. Looking back at the volatility in the bond market during the 2024 cycle, we believe a cautious stance is warranted until a clearer trend emerges in inflation.
