Home National housing National homebuilders rally runs out of steam amid market pressures

National homebuilders rally runs out of steam amid market pressures

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The outlook for US homebuilder stocks is darkening as investors see slowing home sales and soaring prices as a sign that the housing boom may fade away.

An S&P index of 16 builders jumped nearly 250% between March 2020 and early May, with the housing market proving to be one of the few bright spots in an economy crippled by the pandemic.

But the index has fallen about 12% since then, with industry leaders DR Horton Inc. and PulteGroup Inc. among 11 companies that posted double-digit declines.

The pullback came as several measures showed the housing market was cooling.

New home sales and housing starts were lower than economists’ median estimates for April and May, while mortgage applications fell to their lowest level in over a year.

With home prices soaring at the fastest pace 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 home, with the most share. highest since 1982.

This disappointing housing data prompted analysts to cut ratings and forecasts.

DR Horton and TRI Pointe Homes Inc. were downgraded by RBC on Thursday over concerns that order growth would slow as backlogs mount. PulteGroup was brought down to neutral last week by Goldman Sachs, which cited a lack of valuation potential for the company.

“As the data continues to weaken, I think there would be additional risk for stocks,” RBC analyst Mike Dahl said in an interview. The housing market is reaching price levels “which in the past corresponded to a slower demand environment”.

For now, home builders can still charge high prices due to low inventory and lower mortgage rates.

Prices for about 72% of basic floor plans were raised in June, according to RBC data, well above 47% last year. Companies like Lennar Corp. are even experimenting with auctions in certain regions where demand exceeds supply.

But BTIG analyst Carl Reichardt said he was telling home builders not to be too aggressive. It’s “nervous” that carmakers could find themselves in a negative feedback loop where carmakers have to cut prices to retain buyers discouraged by fierce bidding wars.

“We have to make sure the builders don’t kill the goose that lays the golden eggs,” Reichardt said in an interview.

Stephen Kim of Evercore ISI, who described himself as “extremely bullish” by his peers, does not agree that the deceleration in home sales indicates slowing demand.

Instead, he argued that builders are deliberately withholding inventory 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 drop in stock prices as a buying opportunity. As a result of the latest round of homebuilder share sales, “there is no name that I think is not worth holding,” he said.

In the long run, the economic recovery, low mortgage rates, and millennial buyers could benefit builders, although Reichardt said stock transactions would likely be “choppy” before home builders clear their arrears and settle their arrears. solve supply chain problems.

“The worries are going to stay with us for a little while,” Reichardt said. “You’re going to have this struggle between the long-term bullish and the short-term bearish throughout the summer and into the fall, which means stocks will be relatively limited in the range.”


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