Surge in stocks of homebuilders now is losing steam
The outlook for U.S. homebuilder stocks is darkening as investors see slowing home sales and skyrocketing prices as a sign the housing boom may fade.
An S&P index of 16 builders had surged nearly 250 percent between March 2020 and early May as the housing market proved one of the rare bright spots in an economy paralyzed by the pandemic. But the index has slumped about 12 percent since then, with industry bellwethers DR Horton Inc. and Pultegroup Inc. among the 11 companies that saw double-digit declines.
The retreat came as multiple metrics showed that the real estate market is cooling. New home sales and housing starts were under median economist estimates for April and May, while mortgage applications fell to their lowest in more than a year. With home prices surging at the fastest rate in more than three decades, more than half of consumers surveyed by the University of Michigan said in May that it was a bad time to buy a house, the highest share since 1982.
The disappointing numbers prompted analysts to slash ratings and forecasts. DR Horton and TRI Pointe Homes Inc. were downgraded by RBC on Thursday over concerns that order growth will slow as backlogs pile up. Pultegroup was cut to neutral recently by Goldman Sachs, which cited a lack of upside to the company’s valuation.
“To the extent the data continues to weaken, I think there would be further risk to the stocks,” RBC analyst Mike Dahl said. The housing market is reaching pricing levels “that in the past have corresponded with a slower demand environment.”
For now, homebuilders are still able to command high prices because of low inventories and rockbottom mortgage rates. The prices of about 72 percent of base floor plans were raised in June, according to RBC data, well above 47 percent last year. Companies including Lennar Corp. are even experimenting with auctions in some areas where demand is outstripping supply.
But BTIG analyst Carl Reichardt said he is telling homebuilders
not to be overaggressive. He is “nervous” that builders may end up in a negative feedback loop where they have to cut prices to retain buyers that are discouraged by ferocious bidding wars.
“We have to make sure the builders don’t kill the goose that lays the golden egg,” Reichardt said.
Evercore ISI’S Stephen Kim,
who labeled himself as at the “extreme bullish end” of his peers, disagrees that decelerating home sales indicate a slowdown in demand. Instead, he argued that builders are holding back inventories deliberately even though new homes are needed. The gap between supply and demand is still wide, he said.
Kim expects sales to accelerate
by September and sees the recent share price drops as a buying opportunity. After the latest round of selling in homebuilder shares, “there isn’t any name that I would say is not worth owning,” he said.
In the long run, the economic recovery, low mortgage rates and millennial buyers may benefit builders, though Reichardt said stock trading is likely to be “choppy”
before homebuilders work through their backlogs and fix supply chain issues.
“Concerns are going to stay with us for a little while,” Reichardt said. “You’re going to have this tussle between long-term bull and short-term bear through the summer and into the fall, which means stocks will be relatively range-bound.”