Builder Stocks Are Falling. Blame the 10-Year Treasury Yield.

The pullback was probably driven by Tuesday’s gain in the
10-year Treasury,
which was yielding a preliminary 4.247% Tuesday morning—the sixth highest yield of 2023, according to Dow Jones Market Data.

D.R. Horton
(DHI) was down 4.6% on Tuesday,
PulteGroup
(PHM) declined 6%,
Lennar
(LEN) was off 4.9%. Builder stocks like these three, however, have had a big run this year, up between 27% and 70%.

The gain in the yield signals further increases for mortgage rates, which have remained high this year relative to their historic lows earlier in the pandemic. Freddie Mac’s weekly gauge tracking the average 30-year mortgage rate climbed as high as 7.23% in August, its highest level in decades, before dropping slightly last week.

Rising rates, combined with strengthening home prices, have put pressure on prospective buyers. All else equal, the buyer of a $400,000 home would owe just under $400 more a month by buying at last week’s average rate, compared with the average rate one year prior.

Existing-home sales have come under pressure from higher mortgage rates, but sales of new homes have gained as prospective buyers have sought out options. Builders typically have more ability than homeowners to offer incentives, such as mortgage rate buy-downs, to drum up business.

But that volume could come at the expense of builders’ margins,
Moody’s
Investors Service analysts wrote in a note last month. “For new homes, incentives and other factors will lead prices and builder margins to fall through 2024,” wrote the team of analysts led by Griselda Bisono. “The lean inventory of existing homes for sale—homeowners who locked in low mortgage rates are hesitant to sell—will only somewhat mitigate strains on builders’ revenue and margins.”

Write to Shaina Mishkin at [email protected]