More Trouble for Housing and Homebuilders Ahead

Interest rates remain relatively low for homebuyers in need of a mortgage. Still, many local housing markets have experienced at least some buyer exhaustion and some trends feel like they have been peaking for several months. With apartments rents coming down in many areas and with home affordability becoming challenged in many markets, there could be more pain ahead for some of the nation’s top homebuilders after their shares have outperformed the broad market so far in 2017.

Barclays has downgraded many key homebuilder stocks, noting that there has been a recent pullback in buyer traffic. This is said to be inconsistent with rising builder valuations and order growth at the same time there have been some moderating trends. In a June real estate agent survey, Barclays noted a sharp drop in the buyer traffic. The weighted index in primary markets also tumbled and was under expectations in general for the first time in 2017.

While some of these concerns may have been voiced by a recent downgrade elsewhere, the reality is that housing stocks could face some specific pressure ahead from multiple fronts. One such risk is if the stock market were to see that market correction so many investors have wondered about. After all, many housing stocks are up 20% to 30% so far in 2017. And Barclays sees lofty valuations considering the moderating buyer trends.

A fresh look at construction spending was released after the first of July showing that construction spending had been soft in the month of May. That put Spring 2017 as not showing any real growth. Building permits have been down, while spending has been flat to down. The weakness was in residential spending with a drop of 0.6% after seeing declines for single-family homes and in residential improvement.

A later report from the Bureau of Labor Statistics last Friday showed that there were a net of 16,000 construction-related jobs that had been created in June. Meanwhile, the most recent affordability data from the St. Louis Federal Reserve showed that housing affordability had declined steadily from October of 2016 through April of 2017.

Lennar Corp. (NYSE: LEN) was downgraded to Equal Weight from Overweight with a $56 target. Lennar shares had previously closed at $54.60, and the stock was last seen trading down 1.2% at $53.94. Its stock is up 27% so far in 2017.

PulteGroup Inc. (NYSE: PHM) was downgraded to Equal Weight from Overweight with a $24 target price. Pulte was just cut to Underperform from Neutral on Monday by Mizuho, and the $22 target was versus a prior $24.94 closing price. Pulte shares were last seen down 1.4% at $24.71, but this stock has gained more than 36% year-to-date.

Toll Brothers Inc. (NYSE: TOL) was downgraded to Underweight from Equal Weight. Shares of Toll Brothers were down 2% at $40.13 and its stock is up 32% so far in 2017.

TRI Pointe Group, Inc. (NYSE: TPH) was downgraded to Equal Weight from Overweight, and the $14 target is versus a prior $13.50 close. TRI Pointe shares were last seen down 0.8% at $13.40 and its stock is up about 18% so far in 2017.

CalAtlantic Group, Inc. (NYSE: CAA) might feel lucky that Barclays upgraded its stock, but even there it was merely raised to Equal Weight from Underweight. CalAtlantic Group was the one gainer on the day with shares up just 0.5% at $36.51.

The SPDR S&P Homebuilders ETF (NYSE: XHB), the ETF which tracks homebuilders and the companies that sell products for homebuilders and remodelers alike, was last seen down 0.7% at $38.47. Its 52-week range is $30.92 to $39.22 and its shares are up about 15% so far in 2017.

It was just on Monday that Mizuho downgraded KB Home (NYSE: KBH) to Underperform from Neutral, and the price target was cut to $21 versus a prior $24.06 closing price.

Investors might want to take note that Merrill Lynch became even more bullish on homebuilder stocks as recently as June 27. That is a more bullish outlook that was before the May construction spending data had been released. Either way, differing views make a ball game.

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