09:17 AM EST, 12/31/2024 (MT Newswires) -- The housing industry is likely to begin 2025 facing the same headwinds it did this year including mortgage rate volatility, seasonal trade underperformance and increasing new home inventories, Wedbush Securities said in a Tuesday client note.

Volatile rates in the back half of the calendar year have weighed on demand from all prospective home buyer groups, according to the brokerage. Homebuilding companies focused on higher price points and customers seeking to move to bigger homes have a better demand setup than builders catering to rate-sensitive entry-level buyers, Wedbush said.

The seasonal trade of the iShares U.S. Home Construction ETF (ITB) has underperformed by 1,500 to 2,000 basis points depending on when it was purchased, the brokerage said. Wedbush believes the underperformance may narrow if the volatility in mortgage rates eases.

"We firmly believe rate stability helps demand because buyers can budget for a monthly payment and the necessary down payment for their new home," analysts Jay McCanless and Brian Violino wrote in the note.

The brokerage remains bullish on Zillow ( ZG ) as it expects the real estate marketplace to benefit from an increased pool of new and existing homes for sale. Consistent multi-family completions and ongoing starts in process can also provide a stable flow of new customers for the rental segment, according to Wedbush.

Wedbush sees the steady rise in new home inventories as an additional headwind to sales and pricing power for the homebuilders in its coverage. "For the bears, we think the rise in inventories could be categorized as too many builders chasing the pool of potential entry level buyers who are constrained by a lack of credit availability and affordability challenges," according to McCanless and Violino.

Earlier in December, the National Association of Realtors reported that housing inventory at the end of November was 1.33 million units, up roughly 18% from a year earlier. The data showed that local market inventory growth outpaced the national existing home data for the 11th month in a row, Wedbush said.

The brokerage reiterated its outperform ratings on M/I Homes ( MHO ) , Toll Brothers ( TOL ) , Beazer Homes USA ( BZH ) and Taylor Morrison Home ( TMHC ) . Wedbush views Mr. Cooper ( COOP ) , PennyMac Financial (PFSI) and Rithm Capital ( RITM ) as the names to invest in due to rising mortgage rates.