Housing

5 Homebuilder Stocks to Avoid as Rates Rise

Chris Lange

Published: January 20, 2022 7:15 am

Homebuilders were in trouble on Wednesday, despite fairly positive data from the U.S. Census Bureau in regards to new home construction numbers. While positive economic numbers like this tend to be a bellwether in this industry, major names in this industry tanked on the day and could be facing down what some are calling a “wall of worry.”

In terms of the Census Bureau data, privately-owned housing starts in December were at a seasonally adjusted annual rate of 1.702 million, a 1.4% increase over the revised November estimate of 1.678 million. This also compares with expectations for a decline of 1.65 million. New-home construction rose 9% from November to a seasonally adjusted rate of 1.87 million, better than consensus estimates calling for 1.71 million.

Despite these fairly positive numbers, KeyBanc Capital Market’s Kenneth Zenner was on the call explaining why these major names were taking a hit, and what to expect from the industry going forward. Simply put, Zener says that inflation and federal interest rate concerns could act as a “negative factor, superseding fundamental considerations, in a highly repetitive fashion.”

Since 1969, Zenner cited that there have been 19 interest-rate tightening cycles, and homebuilder stocks have declined 89% of the time, with an average aggregate drop of 32%. Also, these stocks dropped 12% for the first three months following the first rate hike and declined 21% from the first rate hike to the last.

Considering this, and that the Federal Reserve hiking rates is clearly on the horizon, Zenner downgraded five major homebuilders. Investors beware.

KB Home (NYSE: KBH) was downgraded from Sector Weight to Underweight with a $38 price target. Analysts have a consensus price target of $58.73. The stock last closed down about 4% at $43.42, and it has a 52-week trading range of $38.05 to $52.48.

Lennar Corp. (NYSE: LEN) was downgraded to Underweight from Sector Weight and has an $86 price target. That is lower than the $131.13 price target. The stock closed down over 4% at $96.86, and it has a 52-week range of $77.86 to $117.54.

Installed Building Products Inc. (NYSE: IBP) had its Overweight rating lowered to Sector Weight. The 52-week range is $99.36 to $141.43, and the consensus price target is $147.80. Shares closed down 0.5% at $113.26.

TopBuild Corp. (NYSE: BLD) was downgraded to Sector Weight from Overweight. The stock closed up nearly 1% at $233.00, and it has a 52-week range of $179.50 to $284.07. Analysts have a consensus price target of $295.78.

D.R. Horton Inc. (NYSE: DHI) was downgraded to Sector Weight from Overweight. Shares were last seen down over 3% at $90.33 on Wednesday, in a 52-week range of $72.57 to $110.45. The consensus price target is $119.89.

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