Interest Rate Hike Hurts Homebuilders

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Well, folks, the talk of the week has certainly been about the Federal Open Market Committee (FOMC) meeting this past Wednesday.

As we talked about on Thursday, the Federal Reserve voted unanimously to raise key interest rates by 75 basis points for the third-straight time.

The Fed’s decision on Wednesday was, of course, fully expected. I was hoping for a 100-basis-point increase, but the Fed doesn’t listen to me!

What was a little surprising was that the Fed revealed it wants to get the Fed Funds rate to 4.25% by year end. So, we can expect another 75-basis-point hike in November and a 50-basis-point increase in December.

And then the Fed is going to hold rates at that level for an extended period of time until they make sure that inflation is defeated.

The reality is the Fed has done a number on the market. They are purposely deflating assets, stocks, real estate – anything sensitive to interest rates.

And, simply put, folks, what the Fed is doing destroys the housing market.

In today’s Market 360, we’re going to talk about what the Fed’s rate increases mean for the housing market… and what it means for homebuilder stocks.

Homebuilders Are Slowing Down

We can see this as homebuilder sentiment continues to plunge. The National Association for Homebuilders reported that its homebuilder index reading dropped to 46 in September, versus 47 expected and 49 previously. The homebuilder index has now dropped for nine straight months, collapsing 44 points in that time.

This marks one of the three biggest collapses in this index’s history.

A reading of 46 comes in below the normal reading of 52, although it is well-above levels where the other crashes bottomed out. This is a housing market that’s rapidly slowing – but it’s rapidly slowing from highly elevated levels.

The result?

Housing prices and rents will fall, but not by much, in the coming months. Some shelter cost disinflation will ease inflationary pressures, but too much will crush the economy, since households draw the majority of their worth from their homes.

Jerry Konter, chairman of the National Association of Home Builders (NAHB) said in a news release this week:

Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households.

Over the past six months, the 30-year fixed mortgage interest rates spiked from 3.2% to 6.38%, breaking above 6% for the first time since November 2008.

Konter continued, saying, “In another indicator of a weakening market, 24% of builders reported reducing home prices, up from 19% last month.”

What Does That Mean for Homebuilder Stocks?

We can see this decline in homebuilder sentiment in the ratings of some homebuilder stocks in my Portfolio Grader.

Let’s take a look at Beazer Homes USA, Inc. (NYSE:BZH), D.R. Horton, Inc. (NYSE:DHI), KB Home (NYSE:KBH) and Lennar Corporation (NYSE:LEN).

Louis Navelliers portfolio grader ratings from BZH, DHI, KBH and LEN

As you can see from the report card above, all four stocks have a C-rating. This means, while they are not “Sells”, they are “Holds” because the companies currently lack strong fundamentals and earnings.

In fact, KB Home and Lennar both posted their third-quarter earnings on Wednesday afternoon, with mixed results that give some insight into the declining house market.

KB Home posted earnings $2.86 per share on revenue of $1.84 billion, less than analysts’ expectations of $1.87 billion. Shares fell 2.1% in extended trading. The company decreased its investments in land acquisition and development by 29% to $556 million, citing a weakening homebuyer demand as the cause.

Lennar reported earnings of $5.18 per share on revenue of $8.93 billion. And new orders decreased 12% to 14,336 units. Lennar CEO Stuart Miller said that “sales have clearly been impacted by rising interest rates.”

Clearly, now is not a great time for homebuilders, and I don’t recommend buying even on a dip.

Disruptions in the supply chain for building materials continue to take a toll, and it is a problem that Konter believes the Fed should be focusing on. As he said in another statement made after the FOMC meeting:

Aggressively focusing on raising interest rates in lieu of fixing our supply-chains could do catastrophic harm to an already ailing housing market and prove to be a counterproductive move that will do more harm than good to the overall economy.

Now, I don’t own any housing stocks. Longtime readers know I like to focus stocks with strong fundamentals and earnings growth. My system is exclusively designed to scour the stock market for individual, high quality shares.

In other words, I zero in on the companies that stand to profit the most from the next big cycle.

And I predict an “Impact Event” is coming that could give you some of the greatest investment opportunities of your lifetime.

It’s an event so huge, the Bank of America says it will hit with a $150 trillion aftershock… and could send tremors rippling across markets for the next three decades straight.

And the key to prepare for this “Impact Event” going forward is to simply identify as many of these cash-rich, quality companies as you can… while prices are still low enough that you could make a substantial return.

To get ready for the “Impact Event,” click here.

Sincerely,

Source: InvestorPlace unless otherwise noted

Louis Navellier


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