By Tomi Kilgore
Mortgage rates above 7% ensure a housing recession, analyst Buck Horne said.
Raymond James analyst Buck Horne lowered ratings on all of the home-builder stocks he covers, as he believes the recent "relentless" climb in mortgage rates has ensured a housing recession.
"Interest rate volatility isn't just slowing the for-sale market," Horne wrote in a note to clients. "We are seeing a broad spectrum reduction in housing demand, including multifamily and SFR [single-family residence]. Net new household formations seem to have come to a standstill."
Horne double downgraded PulteGroup Inc. (PHM), KB Home (KBH) and M.D.C. Holdings Inc. (MDC), moving his ratings down two notches to market perform from strong buy, and cut his ratings on Lennar Corp. (LEN) and Toll Brothers Inc. (TOL) by one notch to market perform from outperform.
He remains bullish on D.R. Horton Inc. (DHI), but less than before, as he downgraded the stock to outperform from strong buy.
"Begrudgingly, we are tapping out on the homebuilders after a relentless [2 percentage point] increase in 30-year mortgage rates over the past 2.5 months," Horne wrote. "Unsurprisingly, numerous anecdotes and indicators...corroborate that the recent parabolic spike in rates has cratered what residual housing demand was still in the market this summer."
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The iShares U.S. Home Construction exchange-traded fund (ITB) has dropped 12.9% over the past three months and tumbled 36.9% year-to-date. In comparison, the S&P 500 index has lost 6.2% the past three months and fallen 21.3% this year.
Horne said that with average effective mortgage rates now north of 7%, virtually all of the housing affordability metrics he tracks are now in "unprecedented" territory. And with the Federal Reserve indicating that more interest rates hikes are coming as inflation remains stubbornly high, mortgage rates will likely remain high.
Read more: Fed OKs another massive interest-rate high -- and it's not about to stop.
"As such, the housing sector and homebuilders must now brace for a Fed-assured hard landing (you win, Jerome), with significantly lower absorption rates and downward pressure on new home prices," Horne said. "While we still adamantly believe single-family housing in the U.S. remains deeply under-supplied, our experience also tells us that homebuilding stocks will be challenged to outperform so long as home prices remain under pressure." ("Jerome" refers to Fed Chairman Jerome Powell.)
(END) Dow Jones Newswires
October 24, 2022 07:32 ET (11:32 GMT)
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