Navigating Sector Rotation: Building Materials and Gas Utilities in the Wake of Rising Mortgage Rates

The U.S. MBA 30-Year Mortgage Rate Hikes to 6.40% in 2025 have become a pivotal force reshaping housing and energy markets. As borrowing costs climb, investors must reassess sector rotation strategies, particularly in Building Materials and Gas Utilities, where shifting demand dynamics and policy tailwinds are creating divergent opportunities.

Building Materials: A Sector at the Crossroads

The Building Materials industry is grappling with a perfect storm of declining housing starts and elevated input costs. Single-family home construction has contracted by 3.0% in 2025, with speculative inventory quadrupling since 2022. This oversupply has dampened demand for raw materials like lumber, concrete, and steel. Tariffs on imported goods—though partially mitigated by USMCA exemptions—have further strained margins.

However, the sector's long-term trajectory is not uniformly bleak. While near-term challenges persist, the anticipated Federal Reserve rate cuts in 2026 could catalyze a rebound in 2027. For instance, a 1% drop in mortgage rates could unlock $1.72 million in pent-up home sales, as seen in 2022–2024. This suggests that undervalued building material firms with strong balance sheets may offer compelling entry points for patient investors.

Investment Insight: Prioritize firms with cost efficiencies and exposure to infrastructure spending. Avoid speculative plays on speculative housing trends.

Gas Utilities: A Declining Relevance

The Gas Utilities sector faces a more existential challenge. The 7.08% mortgage rate peak in late 2023 accelerated a shift away from gas-dependent housing, as electrification and energy-efficient construction gained momentum. With solar energy's share of U.S. renewables projected to double to 50% by 2032, gas utilities like Atmos Energy (ATO) have underperformed, averaging -5% in 42-day windows following rate drops.

Policy tailwinds further cement this trend. The Inflation Reduction Act's incentives for electric vehicles and clean energy have diverted capital from gas infrastructure. Meanwhile, declining residential construction activity—down 33% from 2021 levels—has eroded a core demand driver for gas utilities.

Investment Insight: Short-term exposure to gas utilities carries elevated risk. Redirect capital toward electric utilities, which benefit from long-term contracts and regulatory support for decarbonization.

Strategic Sector Rotation: Balancing Risks and Rewards

The interplay between mortgage rates and sector performance underscores the importance of dynamic portfolio adjustments. While Building Materials may recover as rates ease, Gas Utilities face structural headwinds from electrification. Investors should:
1. Underweight Gas Utilities: Allocate capital away from firms with high exposure to residential gas demand.
2. Target Building Materials for Recovery: Focus on companies with low debt and vertical integration to weather near-term volatility.
3. Leverage Rate Cuts: Position for a 2027 rebound by identifying undervalued construction-related equities.

Conclusion

The 6.40% mortgage rate milestone is not just a macroeconomic event—it is a catalyst for sector realignment. For Building Materials, the path forward hinges on affordability recovery and infrastructure spending. For Gas Utilities, the writing is on the wall: electrification and renewables are reshaping energy demand. Investors who act decisively to rotate into resilient sectors will be well-positioned to capitalize on the next phase of market evolution.