Homebuilding stocks are sinking for the first time this week following a bearish call on Wall Street.
The sector probably won’t see a step up in growth during the second half of this year, and softer demand may pressure gross margins, Zelman & Associates wrote in a note to clients. Third-quarter order estimates are at risk after a disappointing homebuilding survey in August, the report said.
“While we had been cautiously optimistic that order growth deceleration following January’s spike in rates would be less severe than prior periods given a robust economic environment, an expected ramp in community count and a renewed focus on the entry-level segment, it seems unlikely that growth will accelerate in 2H18,” the analyst wrote, trimming third-quarter order estimates and fair-value targets.
The S&P Supercomposite Homebuilding Index slumped 2.5 percent, the most in about a week, at 10:17 a.m. in New York. All 15 members were in the red, with PulteGroup Inc. and Installed Building Products Inc. leading the declines.
The largest exchange-traded funds tracking homebuilders also took a hit. The $1 billion iShares U.S. Home Construction ETF, known by its ticker ITB, fell more than 2 percent, while the $873 million SPDR S&P Homebuilder ETF, or XHB, declined as much as 1.5 percent. Investors heated up trading for the funds as XHB’s volume spiked to close to four times the 20-day average as of 10:20 a.m. in New York. ITB’s volume rose to 2.5 times the 20-day average for that time of day.
The sector’s slide comes as Hurricane Florence lumbers toward the East Coast, threatening to put hundreds of houses at risk. Severe weather is often a boon for homebuilders, who can benefit from an increase in rebuilding orders, though Florence was recently lowered to a category 2 storm. Wedbush analyst Jay McCanless flagged several reasons the hurricane could hurt homebuilders.
“The lack of customers due to evacuation orders and the stormy weather may weigh on order growth in the September quarter,” he said in a report. “Community development may be delayed as the soil dries out.”
It’s not all bad news for the homebuilders, though. The stage may be set for a rebound next year, according to Zelman.
“We remain constructive on a longer-term basis,” the firm said in its report. “While the stocks may remain range-bound, or even come under additional pressure until this inflection point becomes apparent, 2019 may be poised for a rebound in both order growth and stock prices if history provides an appropriate roadmap.”
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