By Builder stocks experienced a decline on Tuesday, and this can be attributed to the increase in the 10-year Treasury yield, which often affects mortgage rates.
Stock Performance
Two exchange-traded funds that track builders and related companies, the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), saw a decrease of 3.2% and 3.8% respectively.
Influence of Treasury Yield
The pullback in builder stocks can be attributed to the rise in the 10-year Treasury yield. On Tuesday morning, the yield stood at a preliminary 4.247%, marking the sixth highest yield of 2023 according to Dow Jones Market Data.
Impact on Specific Builders
D.R. Horton (DHI) experienced a 4.6% decline, PulteGroup (PHM) declined by 6%, and Lennar (LEN) saw a decrease of 4.9%. Despite this recent drop, these builder stocks have shown significant growth this year, ranging between 27% and 70%.
Future Mortgage Rates
The increase in the Treasury yield is an indication of potential future increases in mortgage rates. Throughout this year, mortgage rates have remained high compared to their historic lows during the early stages of the pandemic. In August, Freddie Mac’s weekly gauge revealed an average 30-year mortgage rate as high as 7.23%, the highest level in decades. Although there has been a slight decrease in rates recently, the overall trend has been upward.
Impact on Buyers
Rising mortgage rates, along with growing home prices, have created pressure for prospective buyers. For instance, a buyer of a $400,000 home would now owe nearly $400 more per month compared to purchasing at last year’s average rate.
Sales Trends
Higher mortgage rates have negatively affected existing-home sales. However, sales of new homes have fared better as potential buyers seek alternative options. Builders have more flexibility than homeowners in providing incentives, such as mortgage rate buy-downs, to attract customers.
Potential Concern for Builders
While increased sales volume is beneficial, it may come at the expense of builders’ profit margins. Moody’s Investors Service analysts have noted that factors like incentives and a decrease in prices will likely cause builder margins to decline until 2024. Despite this, the limited supply of existing homes for sale has somewhat mitigated the strain on builders’ revenue and margins.
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