Homebuilder Stocks Fall on Downgrades Predicting Seasonal Share-Price Drop

Key Takeaways

  • Shares of several homebuilders fell on Tuesday after analysts at Wedbush Securities downgraded the companies to “underperform.”
  • Wedbush analysts said the companies’ share prices are likely to fall during the summer as high mortgage rates, inflation and possible delays in interest rate cuts by the Fed weigh on the market for new homes.
  • The analysts see little reason for mortgage rates to fall, and also pointed to the trend of homebuilders relying on price cuts and other incentives to boost sales.

A number of homebuilding companies’ shares fell Tuesday after Wedbush Securities analysts predicted seasonal stock-price drops that could be exacerbated by persistently high mortgage rates, inflation, and delayed interest rate cuts.

Wedbush analysts decreased the target price for three homebuilder stocks and downgraded the rating on five companiesβ€”Lennar (LEN), D.R. Horton (DHI), Century Communities (CCS), Meritage Homes (MTH), and LGI Homes (LGIH)β€”to “underperform” from “neutral”.

As the first quarter of 2024 followed general trends in the homebuilding industry, Wedbush analysts Jay McCanless and Brian Violino wrote that if that continues, those stocks will likely drop in value over the summer.

They also pointed to the trend of the companies in question relying heavily on price cuts and other incentives to increase their sales over the last few years as mortgage and interest rates have remained high.

The analysts said they see little reason for mortgage rates to fall in the coming months, as they have come down slightly from the highest-since-2000 levels they reached in October 2023, but are still largely around 7%.

The Wedbush analysts see the rest of this year likely to play out similarly to 2022 and 2023 because “mortgage rates remain near the highs of the cycle, the supplies of new and existing homes are rising, input costs are inflating, and average closing prices have trended lower over the last 8 quarters.”

Other relevant factors in the real estate market, such as the 10-year Treasury bond yield hitting its highest level in months during Tuesday trading, leave investors beginning to consider the likelihood that the Federal Reserve won’t cut interest rates as much as previously expected this year.

Fed officials have said recently that they still project three cuts to interest rates this year, but need to see clear evidence that inflation is under control before cutting.

LGI was the biggest decliner in the group Tuesday, falling 7.9% to $105.36, while Century Communities dropped 6.8% to $88.95 and Meritage fell 5.2% to $163.06. Shares of D.R. Horton retreated 3.9% to $155.65 and Lennar slipped 3.2% to $162.47.

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