Homebuilders as a group were trading lower following the U.S. Census Bureau’s report that more single-family homes were built in September than in August.
However, the actual number of homes built came in below views, and discouraging news about mortgage applications also hurt the sector.
Large-caps Lennar Corp. NYSE: LEN, NVR Inc. NYSE: NVR, PulteGroup Inc. NYSE: PHM and mid-cap Toll Brothers Inc. NYSE: TOL led the way downstairs as most builders’ stocks caved in.
The bounceback in homebuilding looks good on the surface, but analysts say it’s likely due to permits OK’d months ago, before mortgage rates rocketed higher than 7%.
As of October 18, the rate for a 30-year fixed mortgage was 8.628% and a 15-year fixed was 7.584% for a credit score between 700 and 719.
August Housing Starts Revised Lower
Single-family housing starts rose by 3.2% to a seasonally adjusted annual rate of 963,000 units in September, according to the U.S. Commerce Department. August housing starts were revised lower to 933,000 units from 941,000.
Single-family housing starts increased in the Midwest, West and South, but decreased by 19.0% in the Northeast.
While there’s some good news in there, it’s clearly a mixed bag.
Overall housing starts grew by 7% to 1.358 million total units in September, below economists’ forecasts of 1.380 million units.
Homebuilder Confidence Falling
The National Association of Homebuilders released its October survey on October 17, finding that confidence fell to its lowest point since January.
In other words, those mortgage rates are inflicting a cost on the homebuilding and mortgage lending industries.
“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said NAHB Chairman Alicia Huey in the homebuilder confidence news release.
Huey, a custom home builder and developer from Birmingham, Alabama, added, “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”
Homebuilding has Economic Ripple Effects
Low homebuilder sentiment is detrimental to the economy for several reasons. Decreased building activity could have the ripple effect of fewer jobs in construction and related industries, reducing employment rates.
Additionally, decreased home construction can heighten housing shortages and drive up prices, making homeownership less accessible for many, at a time when high mortgage rates are already resulting in low inventories.
As a group, homebuilders, as tracked by the SPDR S&P Homebuilders ETF NYSEARCA: XHB are down 9.79% in the past three months.
The homebuilders’ ETF also includes new-home-related stocks, such as Williams Sonoma Inc. NYSE: WSM. That’s appropriate, as the homebuilding ripple effect extends to businesses throughout the broader economy.
Homebuilding-Related Employment Goes Beyond Construction
The homebuilders' industry has a multi-pronged impact on the economy and the broader market. The potential for employment goes beyond construction workers and includes architects, suppliers, realtors and others.
The industry also drives demand for various related sectors including manufacturing, as is the case with a company like Trex Co. Inc. NYSE: TREX, whose stock skyrocketed during the housing and remodeling boom in 2020 and 2021.
For example, Williams Sonoma is the most heavily weighted stock in the XHB ETF. The most heavily weighted homebuilding stocks are NVR, Lennar and PulteGroup.
Building products is the biggest sub-industry within the S&P homebuilders index, followed by homebuilding, home improvement retail, home furnishing retail and home furnishings.
Homebuilders Holding Above 200-Day Averages
When it comes to the homebuilders themselves, the NVR chart shows the stock getting support exactly at its 200-day moving average, after the October 18 pullback. The PulteGroup chart and the Toll Brothers chart show stocks holding aove the 200-day line.
The Lennar chart shows the stock that’s the weakest performer among the largest homebuilder stocks. It’s been trading below its 200-day average since October 12.
The homebuilders’ ETF has underperformed the S&P 500 in the past three months, although it’s outperforming the broader index on a year-to-date basis.
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