Builders slump as housing market shifts to the slow lane
The S&P Supercomposite Homebuilding Index is down 21% year-to-date, on track for the biggest annual drop since 2008, when it fell 32%. That's even with tax cuts, unemployment near the lowest since 1969 and a real estate developer in the White House. What gives?
Investors are increasingly worried about what JPMorgan Chase & Co. calls a "fairly tepid" housing recovery. New-home inventory is rising but getting increasingly expensive amid labor shortages, rising interest rates and higher commodities costs — linked partly to tariffs, such as those on imported steel.
The "biggest concern is rising rates in conjunction with higher prices," Susquehanna International Group analyst Jack Micenko told Bloomberg News via email. Micenko said the market is worried affordability will sap demand. Sales of previously owned homes have slowed, while labor and materials costs have been rising, he said.
Builders are counting on millennials to drive growth and while more are purchasing, they’re also the most price sensitive, said Ali Wolf, director of economic research at Meyers Research, a housing consultancy based in Beverly Hills, Calif.
"Where's the affordability tipping point?" Wolf said. "That's part of what investors are watching."
Homebuilding permits — a proxy for future construction — in the key single-family segment dropped in August by the most in seven years, and multifamily permits fell for a fifth-consecutive month.
Housing has been slowing since late spring, particularly in the move-up market and in pockets where builders most aggressively raised prices, BTIG LLC homebuilding analyst Carl Reichardt said in a phone interview. Builder order growth has already started to moderate, a sign of what's to come, he said.
Adding to homebuilder woes, on Monday, Freddie Mac forecast total home sales this year will come in just below last year's level.
"Although the U.S. economy and job market are firing on nearly all cylinders, the housing market has essentially stalled," the mortgage guarantor said. "Weaker affordability, homebuilder constraints and ongoing supply and demand imbalances over the summer resulted in fewer home sales and less home construction compared to earlier this year."
August sales of existing homes missed analysts' projections, while new-home sales fell in three of the four months through July. Figures due Wednesday on new-home sales are projected to show stabilization in August after the weakest pace in nine months. Housing and other economic data may be clouded in coming months by fallout from Hurricane Florence.
"Coming out of the downturn we'd expected a much stronger acceleration but we haven’t really seen that" during the recovery from the housing collapse, said Sam Bullard, senior economist at Wells Fargo Securities.
Wall Street analysts are responding with downgrades. On Friday, JPMorgan cut five homebuilder stocks including PulteGroup Inc. and MDC Holdings Inc. On Sept. 20, Wedbush Securities cut TRI Pointe Group Inc. and William Lyon Homes Inc. on demand concerns. On Sept. 13, Zelman & Associates made a bearish call, warning that softer demand may pressure gross margins.
For the first time in eight years, residential investment is projected to subtract from full-year gross domestic product growth in 2018, according to Bloomberg economist Yelena Shulyatyeva.
For now, eyes are on KB Home's third-quarter earnings, due out Tuesday afternoon. Another disappointment, particularly from a company that targets first-time homebuyers, may drive builder stocks down even further.