Housing stocks fell broadly Wednesday after analysts at Credit Suisse lowered their ratings and price targets on several companies in the sector because of fears of rising interest rates. A drop in housing starts data also weighed on the stocks.
Home Depot and Lowe’s dropped 4.6 percent and 3.1 percent, respectively; Floor & Decor Holdings and Meritage Homes fell at least 4 percent and KB Home and Lennar pulled back at least 2 percent.
Two exchange-traded funds that track housing stocks also dropped. The iShares U.S. Home Construction ETF (ITB) fell 2.2 percent — on pace to post a six-day losing streak — while the SPDR S&P Homebuilders ETF (XHB) declined 1.8 percent.
The home construction ETF is down more than 9 percent so far in October, its worst month since February, on fears about higher interest rates slowing demand. KB Home is down more than 13 percent this month.
Credit Suisse analyst Seth Sigman downgraded both Home Depot and Lowe’s to neutral from outperform. Sigman also lowered his price target on Home Depot to $204 per share from $222 and his Lowe’s target to $111 from $115. Home Depot and Lowe’s traded around $187 and $102, respectively.
“Our key concern is that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability, and inventory creeps up,” Sigman said in a note. “Why is this important? Home prices have been a key driver of big ticket projects, supporting strong average ticket growth (similar to this point in prior cycles), and driving nearly all of the comps growth as of late.”
The 10-year Treasury note yield — which is used as a benchmark for mortgage rates —rose to 3.26 percent last week, its highest level since October 2011. This rise in rates pushed the average rate for 30-year fixed-rate mortgages up to its highest level February 2011. This led to weekly mortgage applications tanking by 7.1 percent last week.
Meanwhile, the Commerce Department said housing starts fell more than expected last month, marking the second straight monthly decline.
Sigman also trimmed his price target on Floor & Decor Holdings to $33 from $50 per share, but kept his outperform rating on the stock.
Susan Maklari, another analyst at Credit Suisse, downgraded Lennar and Meritage Homes to neutral from outperform in one swoop. She also lowered her rating on KB Home to underperform. The analyst said she expects “more tempered demand and rising affordability concerns to weigh on homebuilding sentiment and broader group valuation.”
“This comes as rate hikes and inflation pressures signal that we are moving closer to the latter stages of the cycle. Although we believe housing—and macro—fundamentals remain intact … unit gains are likely to moderate,” Maklari said in a note.
contributed to this report.