(Bloomberg) - 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 fell as much as 7.3% on Thursday 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 Inc., Century Communities Inc. and Taylor Morrison Home Corp. were among the biggest decliners, falling by at least 10% 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 75-basis 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 during his news conference.
The homebuilders benchmark, which includes companies such as KB Home and D.R. Horton Inc., has slumped more than 40% 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 Home Corp. and Green Brick Partners Inc. He also lowered his targets on Century Communities Inc., Beazer Homes USA Inc. and Landsea Homes Corp.
“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 Corp. reports its second quarter earnings. “They give you the first read on what’s going on,” said Bloomberg Intelligence analyst Drew Reading, adding that orders could fall short of expectations, as Lennar’s second quarter results capture the rise in rates.
By John Hyland and Bre Bradham
