Homebuilders' Stocks Near Bear Market as Mortgage Rates Rise

Monday, 24 Jun 2013 05:03 PM

 

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink
Shares of U.S. homebuilders fell for a fourth day Monday, approaching a bear market, as concern mounted that rising mortgage rates could restrain a revival in the housing market.

The 11-member Standard & Poor’s Supercomposite Homebuilding Index slid 1 percent Monday to the lowest level since the end of 2012. It has fallen 19.6 percent from a May 14 peak, close to the 20 percent threshold considered to be a bear market.

The prospect that the Federal Reserve may slow bond purchases has stoked investor concern that mortgage rates will rise and limit new-home sales, which have jumped as inventories for existing properties tightened. Housing shares may have climbed too far after a rally that sent the S&P builder gauge up 84 percent last year, more than six times the gain in the S&P 500 Index, said Vicki Bryan, an analyst at Gimme Credit LLC.

“Investors got way ahead of themselves in estimating performance results for the sector, perhaps by years in the case of some builders,” she said in a telephone interview Monday from New York. “They’ve already sapped most of the logical upside. That only leaves room for disappointment.”

D.R. Horton Inc. and PulteGroup Inc., the two largest U.S. homebuilders, have led the decline since May 14, with each losing 24 percent. Ryland Group Inc. has fallen 23 percent, while KB Home has slumped 22 percent.

Higher Costs

The average rate for a 30-year fixed mortgage jumped to 3.93 percent last week from 3.35 percent in early May, according to Freddie Mac. Borrowing costs probably will rise further after Fed Chairman Ben S. Bernanke said last week that policy makers may slow bond purchases this year amid signs of an improving economy. Wells Fargo & Co., the largest U.S. home lender, was offering a 30-year mortgage at 4.75 percent Monday, according to its website.

An extended rise in rates may hurt homebuilders’ mortgage- origination businesses, which account for an average of about 28 percent of their operating profit, Megan McGrath, an analyst at MKM Partners LLC, said in a note to clients today.

The spread between the rate the financial-services businesses underwrite mortgages for and what investors pay for the loans will shrink, she said. Lennar Corp., the third-largest homebuilder, may be most at risk of lower revenue and margins from this business, according to McGrath.

“Investors should be braced for increased volatility in homebuilding shares over the remainder of the summer as continued fears around higher rates battle with what we expect will be generally positive housing data,” McGrath wrote.

Home Sales

New-home sales rose 2.3 percent in April from the previous month, according to the Commerce Department. A report Tuesday will probably show that purchases in May climbed to a 460,000 annualized pace, the highest since July 2008, according to the median estimate in a Bloomberg survey of economists.

The short-term turbulence in homebuilder share prices will create a “long-term opportunity,” said Robert Wetenhall, an analyst with RBC Capital Markets in New York.

“In the near term, homebuilder stocks will struggle in a rising interest rate environment due to concerns -– either real or imagined,” Wetenhall said in a note to clients today. “In the long term, however, we think that better pricing practices and strong volume growth will reward patient investors with a multiyear holding period.”

The decline represents a “knee-jerk reaction” to rising rates, which may bring share prices down to more realistic levels, said Robert Curran, a managing director at Fitch Ratings in New York.

“This is the market adjusting itself,” Curran said in a telephone interview. “There was an over-reaction on the upside and there was something of an over-reaction to the news on the interest rate. At some point, further out this year, there will something more of a normal balance.”

© Copyright 2014 Bloomberg News. All rights reserved.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web

Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Retype Email:
Country
Zip Code:
Privacy: We never share your email.
 

You May Also Like
Around the Web

Most Commented

Newsmax, Moneynews, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, NewsmaxWorld, NewsmaxHealth, are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved