Why shares of homebuilders just plunged

Why shares of homebuilders just plunged

Looming interest rate hikes are slamming US tech stocks, which dropped sharply last week as investors reassessed how higher borrowing costs could hit their portfolios.

But it’s not the only sector to take a beating.

What’s happening: Shares of US homebuilders including Toll Brothers (TOL), Lennar (LEN) and PulteGroup (PHM) were among the biggest losers on Friday. The iShares US Home Construction exchange-traded fund fell 4.5% and finished the week 9% lower.

Shares of these companies soared in 2021 as the US housing market took off. Average home prices logged their biggest increases on record thanks to limited stock and easy access to cheap loans, which helped fuel demand.

One year ago, the 30-year fixed mortgage rate stood at 2.65%, the lowest on record. Stories of crazy offers and dejected first-time buyers became commonplace. Even Wall Street investors dove into the rush.

He recalled a smaller five-year-old home that he put on the market last January for $425,000, already higher than listings for comparable properties. Interest was overwhelming.

“I stopped counting at 35 offers,” he said. The home sold for $545,000, a 30% increase over the list price.

Shares of Toll Brothers rallied almost 67% in 2021, compared to a 27% jump in the S&P 500. Lennar gained 52%, and PulteGroup climbed 33%.

But the prospect of interest rate hikes, which serve as a crucial benchmark for mortgages, is shaking things up.

The Federal Reserve has indicated that the era of rock-bottom rates will end soon given the need to fight inflation and signs the economy is getting back to normal. Jobs data published Friday firmed up expectations on this front.

See here: American employers added 199,000 jobs in December, a weaker reading than economists had expected. Still, the unemployment rate fell to 3.9%. That’s very close to the historic low of 3.5% reached in February 2020. Wages also rose 0.6% as companies scrambled to attract workers, which could feed price rises.

“With an unemployment rate below 4% and pay pressure building, the Fed looks set to respond swiftly,” ING’s chief international economist James Knightley told clients.

In a note published late Sunday, Goldman Sachs said it now expects the Fed to hike interest rates four times this year starting in March. It had previously penciled in three increases.

Mortgage rates have already started to tick higher, with US bond yields rising as investors brace for action. The 30-year fixed mortgage rate averaged 3.22% for the week ending on Jan. 6, the highest level since May 2020. That’s still low by pre-pandemic standards, but could start to take some of the heat out of the housing market.

That could be good news for would-be buyers that have been edged out by affordability concerns — but lead to a weaker year for companies like Toll Brothers and Lennar that have been riding the wave.

Still, given the desperate need for more housing supply in the United States and the likelihood that prices will stay elevated, analysts think betting on homebuilders remains a smart play.

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