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U.S. HOMEBUILDERS HEAD FOR BIG WEEKLY LOSSES AMID MARGIN, DEMAND CONCERNS

Shares in U.S. homebuilders were sharply underperforming the broader market on Thursday with the PHLX housing index .HGX down more than 2% and its biggest decliners off around 5% while the S&P 1500 homebuilding .SPCOMHOME was down about 3%, on track for its fourth straight day of losses and a 4-day loss of almost 10%.

The declines come at a time when Federal Housing Finance Agency (FHFA) Director Bill Pulte, in an interview with The Builders Daily suggested that homebuilders to boost housing supply even if it hurts margins in order to help fix a housing affordability problem.

In a research note issued Oct 7, Evercore ISI analyst Stephen Kim downgraded his ratings on housing stocks such as D.R. Horton DHI.N, KB Home KBH.N, Meritage Homes MTH.N, Pultegroup PHM.N, Toll Brothers TOL.N and Tri Pointe Homes TPH.N to 'in-line,' writing that "the government’s pursuit of supply-side solutions to address housing affordability is at odds with our 「Less is More」 thesis and could lead to unintended consequences for the industry."

Kim argued that "the main problem facing the housing industry is weak demand, not scarce supply" and that lower mortgage rates is what is needed to boost demand.

Meanwhile, Morgan Stanley sent a research note citing housing strategist Jim Egan saying mortgage rates need to fall closer to 5.5% to yield a more sustained increase in demand and that it would take a month or two for any impact from lower mortgage rates to show up in home sales volumes.

They point to recent data revealing existing home sales volumes moving sideways through the first seven months of the year and that inventories keep climbing with the market having over nine months of new build supply.

The PHLX housing index was on track for its third day of declines out of four sessions, and trading down more than 6% for the week so far. Its biggest decliner on the day was PulteGroup down close to 5% followed by KB Home and D.R. Horton both declining more than 4%. Only one stock in the sector Walker Dunlop WD.N was rising. HGX and SPCOMHOME hit lowest levels since Aug 11.

(Sinéad Carew, Lance Tupper, Saeed Azhar)

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