Home builders drop, after Toll Brothers says the housing market is “softening further”

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December 4, 2018 1:28pm NYSE:XHB

From Tomi Kilgore: Shares of home builders took a broad beating Tuesday, after luxury builder Toll Brothers Inc. confirmed investors’ fears by saying it witnessed the housing market “soften further” in November, especially in California, because of reduced affordability and fewer foreign buyers.

In addition to rising interest rates and “significant” price appreciation the past few years giving buyers reason for pause, Toll Brothers TOL, +0.06% also blamed “well-publicized reports” of a housing slowdown for having a negative impact on buyer sentiment.

The SPDR S&P Homebuilders exchange-traded fund XHB, -3.33% dropped 2.5% in morning trade, with all 35 equity components trading lower, while the iShares U.S. Home Construction ETF ITB, -3.11% slid 2.6% with 46 of 47 components losing ground.

Toll Brothers’s stock slid 1.9%, but pared earlier losses of as much as 10%.

The company reported before Tuesday open fiscal fourth-quarter net income that rose to $311 million, or $2.08 a share, from $191.9 million, or $1.17 a share, in the same period a year ago. The FactSet consensus for earnings per share was $1.84.

Sales for the quarter to Oct. 31 increased 21% to $2.46 billion, above the FactSet consensus of $2.36 billion. Meanwhile, net signed contract vale fell 15% to $1.5 billion, while contract units declined 13% to 1,715.

Chief Executive Douglas Yearley said that despite a healthy economy, he saw a “moderation in demand” during the quarter, as net signed contracts declined 15% in dollars and 13% in units. Then things got worse.

“In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,” Yearley said. “California has seen the biggest decline.”

His comments come after a string of disappointing housing market data points, including a surprise decline in construction spending, a drop in pending home sales to a 4-year low, a near 3-year low in new-home sales and the pace of home price growth slowing to a 2-year low. See Economic Report.

The yield on the 10-year Treasury note TMUBMUSD10Y, -1.80% which provides a guide for mortgage rates, ended October at 3.15%, according to Department of the Treasury data, up from 2.38% a year ago. The yield as declined since then, to 2.98% on Monday. See Bond Report.

“We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum,” Yearley reminded investors.

In 2013, the 10-year Treasury yield rose from 1.86% on Jan. 2 to a 2013 high of 3.04% on Dec. 31, but the SPDR home builder ETF (XHB) still climbed 17.8% that year and the iShares home construction ETF (ITB) rose 9.3%.

So far this year, however, the XHB has shed 20.6% and the ITB has tumbled 26.8%, while the S&P 500 index SPX, -2.36% has gained 3.3%.

The SPDR S&P Homebuilders ETF (XHB) was trading at $34.86 per share on Tuesday afternoon, down $1.21 (-3.35%). Year-to-date, XHB has declined -21.08%, versus a 2.72% rise in the benchmark S&P 500 index during the same period.

XHB currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #32 of 41 ETFs in the Consumer-Focused ETFs category.

This article is brought to you courtesy of MarketWatch.

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