Traders bet on builder stocks despite slowing housing market

Aug 18, 2022, 8:30 AM | Updated: 9:02 am
FILE - A worker toils on a new home under construction on Aug. 30, 2018, in Denver. The U.S. housin...

FILE - A worker toils on a new home under construction on Aug. 30, 2018, in Denver. The U.S. housing market has gone from red-hot to decidedly tepid since the spring, though you wouldn’t know it by this summer's sharp rebound in homebuilder's stocks. (AP Photo/David Zalubowski, File)

(AP Photo/David Zalubowski, File)

LOS ANGELES (AP) — The U.S. housing market has gone from red-hot to decidedly tepid since the spring, though you wouldn’t know it by this summer’s sharp rebound in homebuilder’s stocks.

Lennar, D.R. Horton and other homebuilders have outpaced the benchmark S&P 500 so far this quarter. One prominent exchange traded fund, the SPDR S&P Homebuilders ETF, is up about 23% since July 1. Meanwhile, the S&P 500 is up about 14%.

The rally by homebuilders follows a pullback in mortgage rates since June, suggesting Wall Street is already looking ahead to a rebound from this summer’s weak market.

“In the first quarter, the stocks were down a lot and demand was very strong, but rates were moving higher,” said Carl Reichardt, an analyst at BTIG. “The 10-year Treasury yield has come down and mortgage rates have followed, and that has been beneficial to the stocks.”

Average weekly interest rates for a benchmark 30-year home loan are back around 5% after climbing to 5.81% in June, according to mortgage buyer Freddie Mac. That’s still nearly double what it was a year ago, but the pullback is good news for builders, as lower mortgage rates increase would-be homebuyers’ pricing power.

The 10-year Treasury yield, which influences rates on mortgages and other consumer loans, has been easing amid worries among bond investors that the economy is slowing and could be headed for a recession.

The housing market’s long-term underpinnings remain very favorable for the new home construction business, especially because the inventory of previously occupied U.S. homes for sale remains near historic lows.

For now, however, builders are facing a deteriorating landscape. Sales of new U.S. homes fell in June to a seasonally adjusted annual rate of 590,000 homes, the slowest pace since April 2020, the Commerce Department said this week. The National Association of Home Builders’ latest index of builder sentiment fell in August for the eighth straight month.

Many builders are reporting more cancellations and slowing buyer traffic. To cope, many are offering incentives like paying buyers’ closing costs or buying down the rate on their mortgage.

While investors may have an eye on better days, perhaps next year, there’s likely more pain ahead.

“We are wary about how weak business could be in the second half of the year and in general we think the Street and economists are too optimistic about (housing) starts and sales activity in the back half of the year,” Reichardt said.

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Traders bet on builder stocks despite slowing housing market