Tariffs Could Wreck This Battered Sector

By Larry Benedict, editor, Trading With Larry Benedict

President Trump wasted little time before moving on his tariff promises.

This past weekend, Trump announced a 25% tariff on all imported goods coming from Canada and Mexico. After some back and forth, those are now set to take effect starting in March.

He’s already levied a 10% tariff against China.

The moves impact up to $1.3 trillion in goods. That means the tariffs will have wide-ranging implications for the economy.

But one sector in particular is set to feel the pinch. It’s already reeling from an affordability crisis, which looks set to get worse.

In short, the U.S. housing market could emerge as the trade war’s biggest loser.

And tariffs could be the catalyst that completes a bearish setup…

An Affordability Crisis Set to Worsen

With tariff talk in the headlines, a house may not be the first thing you imagine as an imported good.

But the building materials that go into housing can feel the impact.

More than 70% of imported lumber and gypsum used in home construction comes from Canada and Mexico.

Homebuyers are facing a dramatic rise in costs at a time when home affordability has already turned into a crisis.

Since 2020, the 30-year mortgage rate has risen from 2.65% to 6.95%. And median new home prices currently stand at $427,000. That’s hovering just below the all-time record high.

New home sales are running at an annual rate that’s 32% below the levels seen in 2020 (when mortgage rates were near their lows).

Now tariffs are set to increase prices and sap home demand even further.

And they could be the catalyst that completes a bearish chart pattern in homebuilder stocks…

A Bearish Pattern

Homebuilding stocks performed just fine in the face of rising interest rates and affordability issues.

The SPDR S&P Homebuilders ETF (XHB) holds a variety of housing-linked companies like homebuilders, building products, and home improvement chains.

XHB broke out to new record highs back in late 2023. The sector was rising to record highs even before the S&P 500 did.

But momentum in homebuilding stocks is taking a serious hit. And now we’re seeing a bearish setup that could send homebuilders much lower.

Take a look at the chart:

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XHB peaked last October at around $125. The ETF pulled back and dropped below the 50-day moving average (MA, blue line).

But the pullback was short-lived. XHB quickly recovered lost ground and tested the prior high toward the end of November.

Then a momentum warning signal flashed.

The Relative Strength Index (RSI) – in the bottom panel – made a lower high during that test. That showed underlying price momentum was starting to deteriorate.

From there, XHB turned lower again and saw a large pullback below the 50-day MA.

Then XHB found support near the $100 level and tried to rally into late January.

But now there are a couple more bearish developments to note.

First, the recent rally was turned back at the 50-day MA (the arrow). That also happened as the RSI hit 60, which will often serve as an overbought level during a downtrend.

Take another look:

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Plus, there’s another bearish pattern developing as well:

(Click here to expand image)

XHB appears to be forming a bearish “head and shoulders” topping pattern. The arches in the chart show left and right shoulders along with a head in the middle.

The pattern will complete with a breakdown below the “neckline.” That’s the $100 level, which has served as price support since last April.

A breakdown would establish a downtrend for XHB… and show that tariffs are the latest catalyst in the affordability crisis impacting homebuilders.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict