Builders Looking for Market 'Sweet Spot'

Home builders are encountering more market headwinds now, and while affordability remains an issue, experts cite other reasons for dwindling buyer enthusiasm. 

JMP Securities analyst Peter Martin explains, “You have market sentiment that believes that interest rates are going to significantly derail demand based on affordability,” that hampers builders' stock position, “Portfolio managers are saying, I’m not going to fight the Fed.” Yet, BTIG analyst Carl Reichardt tells MarketWatch, “It’s more psychological. Buyers have been resisting price increases which have been aggressive across the board. Part of it has been materials prices: builders have had to pass on higher pricing,” adding that builder stocks were already expensive going into 2018, and then the release of data on the spring market revealed that the business has slowed down.  

It’s hard out there for the home builders. In late July, D.R. Horton, Inc. announced third-quarter results that beat estimates, and offered stronger guidance for the coming quarters. Net income, sales orders, and home closings were all higher by double digits, management said, citing a set of market conditions that could only be described as a housing sweet spot ... Horton’s stock jumped about 10 percent from a short-term low and drifted upwards over the coming weeks. But then it started falling again, and most recently has been trading just a bit higher than before those earnings. Shares have lost more than 17 percent in the year to date, even as most analysts surveyed by FactSet rate the stock a buy.

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