Higher mortgage rates have weighed on home buyers and sellers.
David Paul Morris/Bloomberg
Home builder stocks are on track for their best week since late last year as U.S. Treasury yields slumped on Thursday. Lower yields could lead to a retreat in mortgage rates—but there’s more to like about these stocks right now, says one analyst.
Two exchange-traded funds tracking the home builders and related industries, the
SPDR S&P Homebuilders
ETF (XHB) and the
iShares U.S. Home Construction
ETF (ITB), closed up 2.17% and 3.42%, respectively, on Thursday. It was the ETFs’ highest close since Oct. 11, according to Dow Jones Market Data. So far this week, the ETFs are up about 8.1% and 9.6%, on track for their best performances since last November.
Home builders’ jump follows an extended slide as higher mortgage rates weighed on buyers, sellers, and builders alike in the second half of the year. Mortgage rates measured by
Freddie Mac
recently rose for seven straight weeks to the highest point in 23 years before falling slightly this week.
The decline in the weekly survey came as the 10-year Treasury yield, with which mortgage rates frequently move, continued a several-day slump, Barron’s reported. While mortgage rates measured by Freddie Mac remained relatively stable week-over-week, Mortgage News Daily recorded dramatic declines Wednesday and Thursday—possibly adding to investor enthusiasm. The daily mortgage rate fell to 7.51% Thursday from 7.69% Wednesday and 7.88% on Tuesday.
In a housing market defined by high costs and few homes for sale, lower rates are good news for builders. Unlike sales of previously owned homes, new home sales have remained strong. With relatively few homes for sale, buyers could be turning to builders for more options—but the companies can also offer incentives, such as mortgage rate buydowns, that are rarer in sales of existing homes.
Plus, as Seaport analyst Kenneth Zener wrote in a Thursday report, builder stocks are relatively cheap. The analyst upgraded five midsize home builders—
KB Home
(Ticker: KBH),
M.D.C. Holdings
(MDC),
Meritage Homes
(MTH),
Taylor Morrison Home
(TMHC), and
Toll Brothers
(TOL)—to Buy ratings from Hold. The analyst noted that he now has Buy ratings on all the builders in his coverage universe.
Many builders are trading around one times book value, Zener notes—a traditional signal that it’s time to buy. “Buy builders at 1x book and sell at 2x is the multidecade, generalist PM’s playbook, and should not be dismissed, absent large pending impairments, which we do not expect,” the analyst wrote. “The more complex pitch for higher multiple builders, justified by higher returns on capital, cash flow matching EPS, or lower leverage, are secondary to book value heuristics, for now.”
Write to Shaina Mishkin at [email protected]
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