Homebuilders’ financial gloom deepens
Rising mortgage rates and softening housing demand are casting a shadow over homebuilding stocks, which fell for a fifth consecutive day and are on pace for their worst start to the year on record.
The S&P Supercomposite Homebuilders Index dropped 7.5 percent for its worst day since June 2020, as investor woes deepened with mortgage rates jumping by the most since 1987 and housing starts dropping more than expected last month. Tri Pointe Homes, Century Communities and Taylor Morrison were among the biggest decliners, falling more than 10 percent each.
“Builders may be tapping the brakes given slowing buyer traffic and the view that prices need to correct in the hottest markets,” said Citigroup Inc. analyst Anthony Pettinari. As the Federal Reserve pursues more hawkish measures after Wednesday’s 75basis point hike, discounting and outright price reductions on houses may become more commonplace, he added in a report released Thursday.
Surging mortgage rates and accelerating inflation have pressured consumers and shaken investor confidence on the resiliency of the torrid demand for homes that was spurred by the pandemic. On Wednesday, Federal Reserve Chairman Jerome Powell said activity in the housing sector appeared to be softening, in part reflecting higher mortgage rates. “We’re well aware that mortgage rates have moved up a lot, and you’re seeing a changing housing market. We’re watching it to see what will happen,” he said.
The homebuilders benchmark, which includes companies such as KB Home and D.R. Horton, has slumped more than 42 percent this year — poised for its biggest annual decline since 2007 — outpacing losses on the S&P 500 Index.
The rapid rise in rates has significantly changed the affordability question for potential buyers, B. Riley analyst Alex Rygiel said in a report published Thursday prior to the release of mortgage rates data. Rygiel downgraded his ratings to neutral from buy and reduced his share price targets on Tri Pointe Homes, Taylor Morrison and Green Brick Partners. He also lowered his targets on Century Communities, Beazer Homes and Landsea Homes.
“Taking a broader view of homebuilders, we cannot ignore investors’ expectations for higher interest rates and the impact it has had, and could continue to have, on the broader markets and the homebuilding sector,” Rygiel wrote in a research note. “We believe interest rates matter more to investors in valuing the homebuilders.”
Investors will get more insight on the health of homebuilders next week, when the second largest US builder Lennar reports its second quarter earnings.