Real Estate

Homebuilding stocks having their worst day since the subprime crisis

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Key Points
  • Mortgage rates fell to a record low last week, but are moving up again this week as lenders try to handle an onslaught of refinance demand.
  • Bank of America downgraded Lennar, Toll Brothers and NVR, saying that while they are still bullish on housing, "We would be remiss to assume no impact on end-market demand from COVID-19."
  • Toll Brothers in particular, a luxury builder, will likely be impacted by the massive drop in the stock market.
Contractors position a wall frame during construction of a new home in Walnut, Illinois.
Daniel Acker | Bloomberg | Getty Images

Stocks of the nation's homebuilders are tanking, on pace for their worst day since Dec. 1, 2008, when the subprime mortgage crisis brought the whole housing market to its knees.

A combination of factors are weighing on the sector. Mortgage rates fell to a record low last week, but are moving up again this week as lenders try to handle an onslaught of refinance demand. Applications to refinance a home loan jumped 79% in one week, according to the Mortgage Bankers Association.

In addition, Bank of America downgraded Lennar, Toll Brothers and NVR, saying that while they are still bullish on housing, "We would be remiss to assume no impact on end-market demand from COVID-19."

Names like D.R. Horton and Pulte are down double digits on the day and well off 52-week highs, as is the home construction ETF, ITB. Toll Brothers in particular, a luxury builder, will likely be impacted by the massive drop in the stock market.

The Dow Jones Industrial Average was down more than 2,000 points, or nearly 9%, in midday trading. Shares of Lennar were down more than 10%, while Toll Brothers shares had shed more than 13%, and the stock was down almost 50% from its 52-week high.  

Analysts cited widespread media coverage, cruise ship quarantines, school closings, corporate travel restrictions and sky-rocketing hand sanitizer prices, as weighing on consumer sentiment, which had been very strong in housing, but is likely to wane. A home is generally the single largest investment a consumer will make. 

"We therefore believe it is prudent to temper our new construction, repair and remodel (R&R) and RV industry macro forecasts," Bank of America analysts wrote in a note to investors.

While there is very strong demand for housing, the market is still facing a severe shortage of existing homes for sale. That should benefit the builders. So far builders have not reported any major supply chain disruptions for products made in China. There is concern that labor, already in short supply in the construction business, could be hit by COVID-19, should builders see the virus become prevalent on job sites.