Back to top

Bear of the Day

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

Is the housing recovery over? From one look at the homebuilder stocks you would think so. The steep climb in interest rates has taken the whole group into bear market territory and the $6.3 billion Pulte Group (PHM - Analyst Report), builder in over 25 states, has been a leader of the decline.

At its May peak, the stock was trading over $24, which means its market cap was over $3 billion greater only 3 months ago. Since it became a Zacks #5 Rank Strong Sell on August 3rd, it has fallen another 8% from $17 to $15.65.

Here's a look at the trend of earnings estimates for PHM which shows how the dreaded Fed "taper talk" has turned the outlook for this builder and others...

As we have watched stocks like Ryland (RYL - Snapshot Report), KB Homes (KBH - Analyst Report), Lennar (LEN - Analyst Report), and DR Horton (DHI - Analyst Report) get clobbered by 25% to 35% since their May highs, PHM was down 40% last week. It is also the first of these to slip to a Zacks #5 Rank.

And while some of these names still sport a Zacks #2 Rank Buy, this is probably because analysts have not gotten around to lowering their estimates yet. The group as a whole carries a Zacks Industry Rank of 185 out of about 250, placing it in the lower third of industries.

This rout of the builders forced me to wonder "If this move in interest rates -- back to some degree of normalcy in QE's twilight -- is negatively impacting what was reasserting itself as a key industry in the US economic recovery, then where will we be when the 30 year mortgage reaches 5%? In other words, if we can't handle this rate rise, what happens without any QE bond-buying and the Fed's exceptionally low rates?"

I recently had a conversation with economist John Blank, who also serves as Zacks Chief Equity Strategist, about these impacts and here's what he had to say about rising interest rates reducing housing demand:

"The only way housing demand is not affected is if the other affordability variables overwhelm the rise in interest rates. So expectations for income growth and job security have to go up, down payment terms have to fall, underwriting standards have to loosen, and lengths of amortization have to rise.

These things can happen. All too often we think that a rise in interest rates will just simply lower demand. That is only the case if all of these other variables do not move."

Viewed this way, it makes a lot of sense what is going on in the market with homebuilder stocks. With the bond vigilantes finally free of the Fed's "ownership" of the Treasury market, they are pricing-in the new levels of risk in fixed income and the economy.

And that means the onus is on the rest of the economy to improve to justify homebuilders earnings estimates and valuations. Until then, tread carefully in the names with dropping estimates and a Zacks Rank of #3 or worse. More of these may become #4's or #5's before they become #1's again.

Values may abound, but the full impact of rising rates may not be factored into all analyst estimates yet.

Kevin Cook is a Senior Stock Strategist for Zacks.com

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
CELL THERAPE CTIC 3.18 +6.19%
DIXIE GROUP DXYN 15.48 +5.45%
BOFL HOLDING BOFI 85.45 +5.16%
RAMBUS INC RMBS 12.36 +4.83%
SHORETEL INC SHOR 8.06 +3.47%