November 1, 2018 / 11:03 AM / 9 months ago

Signs of relief emerge for battered U.S. homebuilding stocks

    By April Joyner
    NEW YORK, Nov 1 (Reuters) - U.S. homebuilders' earnings have
been hit by rising mortgage rates in the latest quarter, but
their shares are showing signs of recovering. 
    The S&P Composite 1500 Homebuilding index              has
dropped 9.4 percent in October and 31.2 percent year-to-date,
but the homebuilding stock index has recovered by 8.2 percent
since Oct. 24. 
    The benchmark S&P 500        index lost 6.94 percent in
October, its worst month since September 2011, but recovered by
2.1 percent since last Wednesday. 
    On Wednesday last week, Wall Street stocks were hit by U.S.
Commerce Department data showing September sales of new
single-family homes fell to a near two-year low.             
    The average U.S. 30-year mortgage rate rose to 5.11 percent
the week of Oct. 19, its highest level since February 2011, the
Mortgage Bankers Association said.
    Since then, mortgage rates have come down again as the
10-year U.S. Treasury yield, on which they are based, has backed
off from its highs earlier in the month.
    The industry's outlook has also turned less dire as the
earnings season has progressed. 
    In early October, D.R. Horton Inc         and Lennar Corp
       , lowered their financial forecasts for the fourth
quarter of 2018, but others, including PulteGroup Inc        
and Meritage Homes Corp        , have given more upbeat outlooks
for 2019. 
    Overall home builder companies have framed the recent
slowdown in sales as a momentary pause rather than the beginning
of a sustained downturn.
    "A significant slowdown could be a warning sign, but that
usually happens when people are afraid of the economy and of
losing jobs," said J.J. Kinahan, chief market strategist at TD
Ameritrade in Chicago. "There's no evidence of that yet."
    Several small-capitalization homebuilders, including LGI
Homes Inc          and Century Communities Inc        , are
scheduled to report profit results in the next two weeks. D.R.
Horton, the largest U.S. homebuilder by market capitalization,
is set to report results on Nov. 8.
    Homebuilders' shares have also been pressured by rising home
    Prices had already been elevated as land scarcity and rising
materials and labor costs helped to cap the supply of new homes.
    In post-earnings conference calls, homebuilders have noted
measures they have taken to address anxieties over rising
    Several, including PulteGroup and Tri Pointe Group Inc
       , are offering financing incentives. Others, such as
Meritage Homes and William Lyon Homes        , are placing more
emphasis on entry-level homes, which are widely seen by analysts
and investors as the most robust segment of the housing market.
    Interest from potential buyers has remained strong even
though sales have fallen. PulteGroup and Meritage Homes both
cited year-over-year traffic increases.
    "Interest is still good," said Jonathan Woloshin, U.S. head
of real estate at UBS Global Wealth Management's chief
investment office in New York. "People are just priced out."
    The climb in home prices may be slowing down though.
    On Tuesday, the S&P CoreLogic Case-Shiller U.S. National
Home Price NSA index indicated a 5.8-percent year-over-year gain
in August, the first time in a year home prices had risen less
than 6.0 percent.
    As a result, some market watchers say homebuilders' shares
may be near a trough. The forward price-to-earnings ratio for
the S&P Composite 1500 Homebuilding index is 8.5, down from 15.9
a year ago, according to Refinitiv data.
    "The outlook doesn't appear as draconian as the market has
priced in," said Jack Micenko, an analyst at Susquehanna
Financial Group in New York.
    Still, the Federal Reserve is widely expected to raise
interest rates in December and in early 2019, which would push
up Treasury yields and mortgage rates. While homebuilding stocks
may be closer to ending their freefall, reaching the bottom
could take several months.
    "It will take some time for them to shake out," said Dryden
Pence, chief investment officer at Pence Wealth Management in
Newport Beach, California. "When the Fed stops raising rates,
that's when stability comes back into the housing market."

 (Reporting by April Joyner; Editing by Alden Bentley)
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