Homebuilder stock woes deepen as rates hurt affordability

Lumber Price Surge Adds To Swelling Homebuilding Costs
Workers install siding on a single family home under construction in Lehi, Utah, U.S., on Friday, Jan. 7, 2022. Soaring lumber prices in the past four months have boosted the price of an average new single-family home by more than $18,600, according to the National Association of Home Builders. Photographer: George Frey/Bloomberg
George Frey/Bloomberg

In a week where homebuilding stocks were faced with surging U.S. Treasury yields and data showing weakening demand for homes, one analyst is throwing in the towel on the sector.

Raymond James analyst Buck Horne downgraded his ratings on all the builders in his coverage, including Lennar Corp. and Toll Brothers Inc., citing surging mortgage rates.

"Begrudgingly, we are tapping out on the homebuilders after a relentless 200 [basis point] increase in 30-year mortgage rates over the past 2.5 months," Horne writes in a Friday note. "The housing sector and homebuilders must now brace for a Fed-assured hard landing (you win, Jerome), with significantly lower absorption rates and downward pressure on new home prices." 

Homebuilders have come under relentless pressure this year, with prospective buyers contending with a surge in borrowing costs as the Federal Reserve stays on its aggressive path of interest-rate hikes. US economic data this week has also showed housing starts declining, adding to evidence that steep mortgage rates are weakening demand. 

Investor sentiment, meanwhile, has declined for the 10th straight month, with the S&P Supercomposite Homebuilding Index has fallen about 37% so far this year. It rose 1.3% this week, trailing the S&P 500's 4.7% gain. 

With many homebuilders sinking to around their book value, Horne expects the group to continue to be challenged if home prices remain under pressure.

"To be clear, we are fully aware that most of the homebuilding sector is already priced for steep housing recession," Horne writes. "That said, we need to help investors understand the downside possibilities for EPS estimates in a world of 7% mortgage rates and unprecedented affordability pressure."

In another Friday note, Barclays analyst Matthew Bouley says that the group will continue to be volatile through the earnings season as the low valuations give some support, "but without any upside catalyst as the next rounds of housing data should worsen." 

PulteGroup Inc. and NVR Inc. are among the bevy of builders expected to report results next week. 

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