Homebuilding stocks may have lost their steam as a sector benchmark dipped for a second week after logging gains for several weeks.
D.R Horton’s struggles will likely put an end to the rally in homebuilding stocks as the top homebuilder disappoints investors with mixed results as concerns arise over elevated valuations, rising interest rates, and scarce building materials in the robust housing market, Bloomberg reported.
D.R. Horton, targeting entry-level housing with limited inventory, surpassed estimates but disappointed in terms of new order expectations, according to Wall Street analysts.
But before the slump, things were going smoothly.
Investors flocked to the sector, boosting sentiment to a year-high in July as builders gained market share from pre-owned homes and smaller firms amid increased demand for newly constructed properties.
But elevated valuations, along with rising interest rates and scarce building materials, pose threats to the sector, and potential rate cuts may prompt existing homeowners to re-enter the market.
“If you can sell and home and then close the home in the same quarter, that’s going to juice your earnings,” said Tyler Batory, an analyst at Oppenheimer & Co. Investors. “This is why builders, especially D.R. Horton, were crushing estimates earlier this year — cycle times have gotten a bit better. How long it takes to build a home has improved.”
Still, the sector remains in limbo.
Despite high demand, only 1 percent of homes in the U.S. traded hands this year, the lowest share in a decade, as reported by Redfin. Deputy chief economist Taylor Marr said in the report mortgage rates would have to drop closer to 5 percent to free up some inventory.
– James Van Bramer
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