HD down 12%: housing starts at 2020 low, XLRE 300 bps lag
US housing starts hit their weakest pace since 2020 in May-June 2026, dragging Home Depot (HD) down 12% on building materials demand fears. XLRE vs. SPY spread, mortgage origination collapse, California sales data, and builder permit trends decoded.
RKey facts
- US housing startsMonthly US new-residential-construction report. Leading indicator for housing market and rate-sensitive economic activity. fell to weakest pace since 2020 in May-June 2026
- Home Depot (HD) down 12% on weakening building materials demand
- XLRE lagging SPY by 300 bps; residential builders under pressure
- California home sales up 5.1% YoY in May, but new listings slowing sharply
- Mortgage origination demand collapsing as rates remain elevated under Warsh Fed
What's happening
US housing startsMonthly US new-residential-construction report. Leading indicator for housing market and rate-sensitive economic activity. plummeted to their weakest pace since 2020 in May and June 2026, marking a sharp deterioration in residential construction activity. The collapse reflects a combination of elevated mortgage rates under the Warsh Fed, persistent affordability headwinds, and a chronic shortage of skilled construction labor. While existing home sales rose modestly in May (up 5.1% year-over-year in California, with median prices hitting new records in some markets), housing permits and starts have decoupled sharply, signaling builders' inability or unwillingness to begin new projects.
Home Depot (HD) shares have fallen 12% as the market prices in weaker demand for building materials and home improvement products. The broader real estate sector ETFExchange-Traded Fund - a basket of securities trading like a single stock. (XLRE) is lagging SPY by 300 basis points, reflecting investor exodus from residential construction names like Lennar, KB Home, and PulteGroup. Mortgage originators are also under pressure as refinancing demand collapses and purchase originations slow. Banks dependent on real estate lending fees and construction-linked credit exposure face margin compression.
RE/MAX reported that home sales rose for the fourth consecutive month in May (up 7.9%), but this masks divergent regional trends: stronger luxury markets in California and Northern Virginia contrast with softening entry-level demand in regions with lower income levels. New listings are slowing even as sales stabilize, suggesting inventory constraints and builder caution. The disconnect between sales and starts implies existing inventory turnover rather than new construction growth, limiting upside for construction materials suppliers and labor-intensive builders.
The crux of the debate is whether the Fed will ease mortgage rates faster than current expectations to re-stimulate housing. Some analysts argue that a hawkish Warsh will keep rates elevated through 2026, exacerbating the affordability crisis and forcing starts even lower. Others contend that housing weakness will accumulate fast enough to force the Fed's hand and trigger an earlier pivot to cuts. Commercial real estate debt stress and private-credit defaults (now at 3-year highs) add to the pressure on residential firms that rely on balance-sheet strength to finance land and construction inventory.
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