Shares of homebuilders get pummeled by fears of rising rates

Homebuilders are headed for their sharpest monthly nosedive since March 2020 as the stocks get pummeled by fears of rising rates. 

A host of factors are at play here. Early in the pandemic, homebuilders benefitted as soaring demand for housing slammed into thin supply caused by under-building. The stocks rose along with home prices, as builders battled choked supply chains and labor constraints to meet the seemingly insatiable demand. 

That’s changed as rates worries come to the forefront. Now, the stocks are tumbling by the most since the pandemic hit and spooked investors, with the S&P Supercomposite Homebuilding Index down more than 16% in January, its worst monthly performance since it lost 38% in March 2020. 

“It’s a headwind to everybody across the sector, nobody is completely immune,” analyst Rafe Jadrosich, who covers homebuilders and building products for BofA Global Research, said in an interview. “It will reduce the buying power of every type of home buyer, regardless of what price points they’re looking at.” 

D.R. Horton Inc, the largest builder in the U.S. by volume, has sold-off about 20% this month, wiping out roughly $8 billion of market value. Luxury-focused builder Toll Brothers, Inc. has also fallen 20%, knocking about $2 billion off its market cap. On the other end of the spectrum, KB Home has fallen only 7.5% this month after it got a boost from its earnings report. 

The stocks took a sharp leg down on Wednesday, as Federal Reserve Chair Jerome Powell discussed the central bank’s readiness to consider a rate hike in March. However, they’ve rallied in the past two sessions and are ending the month on a stronger footing than where they started.

Jadrosich thinks demand from entry-level buyers may be more resilient, as their push to buy houses appears to be more need-based than it is for buyers looking to trade-up from their current homes. He recently upgraded KB Home and downgraded Toll Brothers and Lennar Corp. in light of the rates environment. 

With mortgage rates still at the lower end of where they have historically been, Jadrosich believes the focus is now on how fast they rise. “It can frustrate home buyers,” he said.