INVESTORS are ditching US homebuilder stocks at a record pace as elevated borrowing costs bruise the industry’s prospects and signal that the shares may have further to fall.
Blows to the sector have come in quick succession. First, data on Tuesday (Feb 18) showed confidence among US homebuilders dropped in February to a five-month low. The next day, investors learnt that US housing starts slowed in January. Also this week, weak earnings results from luxury builder Toll Brothers affirmed the dire situation: High interest rates are crushing demand, and the spectre of rising costs due to tariffs is snuffing out any hope for profit growth.
Homebuilders are the second-worst performing sector in the S&P 500 Index since President Donald Trump’s election win, sinking 24 per cent. With six more sessions to go in February, a fund tracking the group – the iShares US Home Construction ETF – is poised to mark its largest-ever monthly outflow. The recent weakness follows two years of solid gains when the homebuilding index gained 70 per cent compared to the S&P 500’s 53 per cent advance.
“If you are going to trade, I would not mess around in this sector,” said Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management.
Investor positioning also suggests that traders are bracing for more near-term declines. According to Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, the demand for options that protect against losses in homebuilders is on the rise.
Mortgage rates are currently hovering near 7 per cent, while median prices for new single-family homes are 30 per cent higher than in December 2019. Together, those factors have already battered consumers’ ability to afford housing. On top of that, a potential 25 per cent tariff on imports from Canada and Mexico, and a 10 per cent levy on Chinese goods, threatens to raise prices on building materials.
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About 32 per cent of appliances and 30 per cent of softwood lumber come from international trade, according to the National Association of Home Builders.
“Affordability is still restrictive,” said Dennis DeBusschere of 22V Research. “Most of the decrease in housing affordability has been from the increase in home prices,” he wrote in a note to clients on Thursday, adding that mortgage rates falling to 6 per cent would have a limited impact on buying power.
As a result, in the “short-term, housing activity looks biased flat to lower,” DeBusschere said.
However, valuations of homebuilder shares are turning cheaper. The sector’s price-to-book ratio has now fallen below its long-term median, suggesting there is a “decent entry point to position for longer-term tailwinds” in 12 months or longer, DeBusschere said. The index is currently trading at 1.8 times its annual book value, according to data compiled by Bloomberg, compared to the S&P 500 Index’s 5.3 times.
In the longer term, the strategist expects the housing industry to strengthen, noting that the gap between the current homeownership rate and the long-term median implies a shortage of three million homes.
Meanwhile, technical strategists who analyse trading patterns to gauge an asset’s trajectory point out emerging bearish signals that imply more pain ahead.
A decline this week in the iShares homebuilding ETF briefly pushed it below closely watched trend lines that potentially suggest deeper losses.
“A drop below the lows from last summer of about US$97.50 would confirm the breakdown,” said Matt Maley, chief market strategist at Miller Tabak + “The homebuilders are a very important indicator for the economy. So, if this industry weakens, it causes weakness in other areas of the economy.” BLOOMBERG
