Stock Market Today: Stock Prices Drop as Oil Prices and Yields Reach Highest Levels Since 2024

Stock Market Today: Stock Prices Drop as Oil Prices and Yields Reach Highest Levels Since 2024

Wedbush lowered shares of five homebuilder stocks on Tuesday, citing seasonality-related headwinds in what it called the most “normal” year for real estate industry trends since 2019.

The company downgraded all five stocks from neutral to underperform, lowering its price target on Century Communities (CSC) to $82 from $92, LGI Homes (LGIH) from $88 to $74, and Meritage Homes Corporation (MTH) to $148 against $155 while keeping its price targets unchanged on DR Horton (DHI) and Lennar (LEN) actions.

“No year in residential construction follows a precise timeline of a perfect surge in demand in the spring, followed by a normal seasonal decline in demand over the summer,” wrote Wedbush analyst Jay McCanless.

“However, 2024 was the most ‘normal’ year we have seen for the homebuilding industry since 2019 in terms of normal seasonality. Therefore, we believe these names could experience a normal seasonal decline in price. stocks during the summer, particularly after seasonal trading. the window closes in April/May.”

Notably, the company kept its earnings estimates unchanged for all five stocks.

The bearish call comes as stocks, with the exception of Lennar, have underperformed the iShares US Home Construction ETF (ITB) since the beginning of the year.

“We believe this underperformance could worsen if land acquisition and development costs continue to rise and lumber prices continue to appreciate,” McCanless wrote.

Higher interest rates for longer and a lack of housing supply have allowed builders to focus their attention on an underserved segment: the first-time buyer. Manufacturers have offered price reductions and incentives to increase volume. But this strategy had the effect of reducing gross margins.

McCanless predicts the same scenario will play out in the second quarter of this year, as mortgage rates remain near cycle highs. The 30-year fixed rate loan fell to 6.79% from 6.87% a week earlier, according to Freddie Mac.

Many housing economists believe mortgage rates will likely fall in the second half of the year as the Federal Reserve lowers interest rates. But McCanless doesn’t think the decision will be so mechanical.

“We believe this is still the consensus view in the market, but we take an opposing view on this front because we believe mortgage originators (bank and non-bank) are unwilling to bear the risk early repayment without being compensated for this risk”, he noted. .

McCanless also notes that the spread between the 30-year mortgage and the 10-year Treasury today is “artificially wide” to account for refinancing risk.

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