Good news is killing housing stocks

The much-better-than-expected September jobs report this morning is giving the market (SPDR S&P 500 ETF) a lift, especially small cap stocks (see the iShares Russell 2000 ETF) closely linked to the near-term outlook on the US economy. But housing-related stocks are a notable exception to this bullish picture.

The logic driving their laggard status today is pretty straightforward.

An economy that generated 254,000 jobs in September — with unemployment falling to 4.1% — doesn’t seem to need a series of half-percentage point rate cuts from the Federal Reserve, as some expected to see not too long ago.

As a result, the government bond yields have risen sharply, which will, in turn, push mortgage rates up, reducing the affordability of housing, and possibly dampening activity in the industry. That affects not only homebuilders themselves, but also ancillary businesses, such as storage spaces — where people stow stuff when they’re moving — and credit check companies like Equifax.

For what it’s worth, Goldman Sachs analysts noted earlier this week that there might not be much more room for mortgage rates to fall. (The 30-year fixed rate has dropped about 1 percentage point this year but has stalled out above 6% for a few weeks.) Their position is “premised on the view that a gradual build-up of positive growth data, a data-dependent Fed, and limited scope for fiscal consolidation will compel the market to reprice the terminal Fed Funds rate higher, lifting intermediate yields,” they wrote in a client note.

Translation: The economy is good, the Fed won’t cut a ton, and the US government is going to keep running big deficits, all of which will put upward pressure on government bond yields and mortgage rates.