A Toll Brothers housing development.
Scott Olson/Getty Images
Analysts from Bank of America and Wells Fargo downgraded the stocks of multiple home builders, citing slowing demand in the housing market.
Rafe Jadrosich of Bank of America downgraded his Dream Finders Homes (ticker: DFH) to Underperfrom from Neutral, cutting Owens Corning (OC) to Underperform from Buy. He lowered his price targets for Dream Finders and Owens Corning to $10.50 from $18 and to $80 from $119, respectively.
Wells Fargo analyst Deepa Raghavan, meanwhile, downgraded both M.D.C. Holdings (MDC) and Meritage Homes (MTH) to Underweight from Equal Weight, and cut Toll Brothers to Equal Weight from Overweight. She slashed her price targets on the three stocks to $27 from $40, to $65 from $90, and to $48 from $56, respectively.
“We believe new home demand deteriorated over the last few weeks as a result of the spike in mortgage rates…plummeting consumer confidence and the weaker economic growth outlook,” Jadrosich wrote in a research note.
Data from Freddie Mac (FMCC) on Thursday showed the biggest weekly increase in mortgage rates in 35 years, continuing a rise that is making it more difficult for buyers to afford a home.
And two closely watched gauges of new-home construction fell in May, according to government data also released Thursday. The seasonally adjusted annual rate of housing authorizations, or issuance of permits to build a home, decreased 7% month over month to about 1.7 million, while the rate of housing starts fell 14.4% to about 1.6 million.
Raghavan said in her research note that “given the unprecedented rise in interest rates YTD [year to date], housing market softness is hitting faster than many anticipated.”
The SPDR S&P home builders ETF (XHB) has fallen 15.4% so far this month, leaving it down 38.5% in 2022. If the year were to end today, it would be the worst performance for the ETF since 2007, when it fell 48.25% for the calendar year, according to Dow Jones Market Data.
“We believe investors will continue to assume the worse case scenario and value stocks based on risk factors such as entry level exposure, land risk, margin decline potential etc.,” Raghavan wrote.
Dream Finders CEO Patrick Zalupski wrote in an email to Barron’s that “while we acknowledge the rapid increase in interest rates and recent appreciation in home values poses headwinds, we believe there is an overall shortage of homes available and the supply-demand gaps will persist in the coming years. We view the current pace of absorption as a ‘normalization’ of demand to what is likely prepandemic levels when the housing market was healthy.”
“If there is a dislocation in the housing market, Dream Finders Homes
will be very well positioned to capitalize on potential opportunities and remain profitable” Zalupski added. “We built our Company from the Great Financial Crisis of 2008 and our business model is designed to provide operational flexibility and protection throughout economic cycles.”
Home builders aren’t the only companies to feel the sting of the housing slowdown. Real-estate companies Redfin (RDFN) and Compass (COMP) both said they were going to cut their workforces earlier this week. Redfin ’s CEO Glenn Kelman said in a blog post the day the company announced the layoffs that “mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales.”
Write to Angela Palumbo at angela.palumbo@dowjones.com
Source: barrons.com
