Mastering Sector Rotation: How the MBA Mortgage Market Index Shapes Construction and Materials Investments in 2025

The U.S. MBA Mortgage Market Index has emerged as a critical barometer for investors navigating the 2025 housing cycle. With mortgage rates fluctuating between 6.65% and 6.84% in August 2025, the index has revealed a dynamic shift in borrower behavior, driving capital toward construction-linked equities and materials. For investors, understanding this interplay between mortgage demand and construction activity is essential for strategic sector rotation.

The Refinance Surge: Unlocking Equity and Fueling Construction

The MBA's Refinance Index surged 5% in early August, reaching a four-week high, as 30-year fixed rates dropped to 6.77%. This 10-basis-point decline in rates—driven by weaker economic data and falling Treasury yields—sparked a 23% weekly spike in refinance applications. The result? Over $100 billion in equity unlocked for homeowners, much of which is being redirected into home improvements and new construction.

Construction-linked stocks like Lennar (LEN) and PulteGroup (PHM) have outperformed the S&P 500 by 8–10% since January 2025, reflecting this surge in demand. Vulcan Materials (VMC), a key supplier of aggregates for construction, has historically gained 12% over six months when the MBA Index remains above 240—a threshold it has surpassed in 2025.

The Purchase Index: A 17-Month High and Housing Starts on the Rise

While refinance activity dominates headlines, the Purchase Index has quietly reached 170.25, its highest level in 17 months. Despite 30-year rates hovering near 6.84%, housing starts are projected to rise 4–5% in August. Affordable housing builders like D.R. Horton (DHI) and NexPoint Residential (NXRT) are well-positioned to capitalize on this trend.

However, multi-family developers face headwinds. With speculative inventory at 385,000 units—the highest since 2008—investors are advised to underweight this segment and pivot toward infrastructure REITs like Brookfield Infrastructure Partners (BIP), which benefit from long-term demand for logistics and utilities.

Materials and Infrastructure: The Hidden Winners

The MBA Index's influence extends beyond residential construction. Industrial materials firms such as Cement Co. (CEM) and LafargeHolcim (HLI) are seeing increased demand for cement and steel as housing starts accelerate. Traditional banks like JPMorgan Chase (JPM) and Wells Fargo (WFC) are also benefiting from stabilizing net interest margins in a high-rate environment.

Meanwhile, mortgage REITs like Annaly Capital Management (NLY) face challenges as the refinance surge increases prepayment risks. Investors are advised to rotate capital away from mortgage REITs and into banks, which offer more predictable cash flows in a high-rate climate.

Sector Rotation: Construction ETFs Outperform, Consumer Discretionary Lags

The MBA Index's divergence between refinance and purchase activity—refinance up 25% versus purchase up 0.1%—signals a shift in consumer priorities. Historically, this trend has led to an 8% underperformance in the Consumer Discretionary sector as households allocate more capital to housing.

Investors are advised to overweight construction and materials ETFs like the Homebuilders Select Sector SPDR Fund (XHB) and Construction Materials Select Sector SPDR Fund (ITB), which have outperformed the S&P 500 by 18% year-to-date. Conversely, sectors like retail and travel should be underweighted to hedge against macroeconomic risks.

The Road Ahead: Rate Cuts and Strategic Positioning

With mortgage rates projected to stay in the 6–7% range through 2027, the MBA Index will remain a critical guide for investors. The anticipation of potential Federal Reserve rate cuts in late 2025 could further stimulate mortgage activity, particularly for affordable housing and hybrid work environments.

Builders are already adapting, leveraging modular construction and ESG-aligned projects to meet evolving buyer preferences. Meanwhile, alternative real estate sectors like data centers and senior housing are gaining traction, offering stable cash flows in a recalibrated market.

Conclusion: Aligning with the Housing Cycle

The U.S. MBA Mortgage Market Index is more than a data point—it's a strategic tool for investors. By aligning portfolios with construction-linked equities, materials, and infrastructure while hedging against overleveraged sectors, investors can position themselves to thrive in a shifting economic landscape. As the housing market continues to evolve, the MBA Index will remain a vital compass for navigating sector rotation in 2025 and beyond.