Why homebuilders’ stocks look wobbly – Orange County Register

According to the Dow Jones Select US Home Construction Index, shares of US homebuilders rose 48% last year, down 9% in early 2022.

Shares of these companies skyrocketed in 2021 when US housing market takes off. Median home prices posted the most record gains, thanks to limited supply and easy access to cheap loans, which helped boost demand.

A year ago, the 30-year fixed mortgage rate was at 2.65%, lowest on record. Stories of crazy offers and rejected first-time buyers have become commonplace. Even Wall Street investors jumped into the frenzy.

“It’s been a crazy year,” Matt Holm, a Compass dealer in Austin, Texas, recently told my CNN.

He recalls a smaller five-year-old home that he put on the market last January for $425,000, well above listings of comparable properties. Interest was overwhelming.

“I stopped counting 35 offers,” he said. The home sold for $545,000, a 30% increase from the list price.

Shares of Toll Brothers are up nearly 67% in 2021, compared with a 27% gain for the S&P 500. Lennar is up 52% ​​and PulteGroup is up 33%.

But the prospect of rate hikes, widely seen as a key benchmark for mortgages, is shaking things up.

The Federal Reserve has indicated that the era of bottoming interest rates will soon be over due to the need to fight inflation and signs that the economy is returning to normal. Friday’s jobs data reinforces expectations in this respect.

See here: American employers added 199,000 jobs in December, a reading weaker than economists had expected. However, the unemployment rate fell to 3.9%. This is very close to the historic low of 3.5% hit in February 2020. Wages are also up 0.6% as companies scramble to attract workers, which could drive down food prices. livestock increased.

“With unemployment below 4% and wage pressure mounting, the Fed looks ready to respond quickly,” international economist James Knightley of ING told clients.

In a note published late Sunday, Goldman Sachs said it now expects the Fed to raise interest rates four times this year, starting in March. Before that, it tripled.

Mortgage interest rate has started to tick higher, with US bond yields rising as investors prepare for action. The 30-year fixed mortgage rate averaged 3.22% in the week ending January 6, its highest level since May 2020. It’s still low by pre-pandemic standards, but there’s room for improvement. may begin to cool the housing market.

That could be good news for buyers who will be put off by affordability concerns – but lead to a weaker year for companies like Toll Brothers and Lennar, who have been at the forefront of this wave. .

However, in the face of greater demand for housing supply in the United States and the possibility that prices will continue to soar, analysts say betting on homebuilders remains a smart bet.

“The post-Covid housing superbike is far from over,” said Buck Horne, an analyst at Raymond James, in a research report published Monday.