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As Treasury yields continue to rise in the face of stronger inflation expectations, mortgage rates have also been rising. In September 2017, a 30-year mortgage would cost you approximately 3.78%. In February 2018, that same 30-year mortgage now costs approximately 4.32%. That’s quite an increase in a five-month span, and homebuilders like Toll Brothers Inc (NYSE:TOL) are feeling the pinch. The higher mortgage rates go, the more downside pressure is applied to home prices, which squeezes homebuilder margins. Wall Street has noticed the shift and has started to sell stocks like TOL.
TOL has been able to recover somewhat from this selloff during the past two weeks and climb back up to resistance at $47, but we don’t expect the stock to rise any farther than this. In fact, we are looking for it to drop back down toward support at $44 in the run up to the company’s earnings announcement on Tuesday, Feb. 27, before market open.
This move lower will likely be driven by Treasury rates continuing to rise, coupled with expectations of slower growth from TOL — just like we have seen from TOL’s peers, like PulteGroup, Inc. (NYSE:PHM) and D. R. Horton Inc (NYSE:DHI).
‘Buy to open’ the TOL March 45 Put (TOL180316P00045000) for a maximum price of $1.10.
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