HomeMost PopularIs a Significant Decline in Homebuilder Stock Prices Imminent?

Is a Significant Decline in Homebuilder Stock Prices Imminent?

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The housing market is expected to experience a reset in homebuilder stock prices due to a combination of factors. With mortgage rates at a 20-year high, worsening affordability, and tighter household finances, housing market activity is beginning to suffer.

Current Market Conditions

In recent weeks, the mortgage purchase applications index has shown a slight decline. This trend is likely to continue as the 10-year Treasury yield continues to rise. Currently, the base 30-year fixed-rate mortgage stands at 7.5%, making housing purchase affordability even more challenging.

New home sales in August disappointed, falling 8.7% compared to July. The Census Bureau’s estimation of these figures may be inaccurate, with a potential variance range of +6.9% to -24.3% at a 90% confidence level. These numbers suggest that home sales hit a wall in July and August, with existing and pending home sales reaching near-historic lows.

The Impact on Homebuilder Stocks

Despite experiencing a decline since their peak in August, homebuilder stocks remain significantly higher than their late 2022 levels. However, profitability and earnings for homebuilders have been negatively affected by discounts and incentives, leading to a bearish outlook for these stocks.

For example, KB Home reported a decline in EPS for FY Q2 2022 compared to the same quarter this year, yet the stock trades 80% higher than a year ago. Similarly, LEN reported a decrease in EPS for FY Q3 2022, but the stock is 52% higher than a year ago. These valuation levels are expected to reset considerably lower.

Investment Strategy

To capitalize on the expected decline in the housing market, investors can consider various strategies. One approach is to purchase puts on Airbnb (ABNB) stock, as it is anticipated that there will be a surge in ABNB properties for sale in the coming months. Moreover, investing in puts on Toll Brothers (TOL) and PulteGroup (PHM) can be beneficial, as these stocks have not experienced as substantial of a decline compared to other homebuilders.

It is worth noting that the high-end and luxury home market is entering a challenging period, making it a potential target for bearish bets.

Conclusion

The housing market’s current conditions indicate that a significant decline in homebuilder stock prices is on the horizon. Factors such as rising mortgage rates, decreasing affordability, and weak market activity suggest an impending reset for these stocks. Investors should carefully consider their investment strategies in light of these developments.

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