A slowdown in U.S. home sales is weighing on homebuilder stocks.
Most of the builders are down more than 15 per cent this year, even as the broader market has been on a milestone-setting run. The S&P 500, the market’s benchmark index, is up about 8 per cent for the year.
Builder shares were already having a rough year as investors worried that rising mortgage rates could dampen sales. Those jitters appear to have been well-founded. A recent batch of weak housing data suggest the housing market is losing momentum, despite an otherwise solid economy.
“The slowdown in activity is really related to prices,” said BTIG homebuilding analyst Carl Reichardt, adding he expects many builders to report slow or flat earnings growth next year.
A growing economy and job market have boosted demand for housing, but higher mortgage rates and a tight inventory of homes on the market has made affordability a challenge for many would-be buyers.
Sales of new U.S. homes slumped 1.7 per cent in July, the second straight monthly decline. Sales of previously occupied homes have fallen four months in a row.
Builders have been aggressively raising prices for several quarters amid increased costs for lumber, steel and other building materials. The industry has also been grappling with escalating cost for labour and land.
The average sales price of a new home climbed 5.8 per cent in July from a year earlier to $394,300.
“The consumer is resisting that to some degree,” Reichardt said.
What does the weaker housing data bode for homebuilder shares?
Investors need to balance the slowdown in housing with trends that favour builders: A strong economy and persistent need for housing.
“That tension is creating an uncertain environment for the stocks,” Reichardt said. “Absent new positive or negative change points, the stocks are probably adequately discounting this uncertainty.”