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(Bloomberg) -- Wall Street’s pandemic gem faced a broad selloff Wednesday as fears of constrained homebuilders’ margins, bloated inventories and elevated mortgage rates rattle investor sentiment.
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Shares of all 18 members in the S&P Composite 1500 Homebuilding Index fell, sending the gauge to the lowest level since December 2023, after results from luxury homebuilder Toll Brothers Inc. and key construction data Wednesday indicated the residential real estate market may be in store for more turbulence.
After Toll Brothers finished last year as the second-best-performing public builder, the revenue miss in its first fiscal quarter and disappointing second-quarter forecast stoked market jitters. Raymond James analyst Buck Horne marked the report as the company’s first quarterly earnings miss in the last 20 periods.
Analysts including Evercore ISI’s Stephen Kim see Toll’s elevated level of cheaper spec homes — built under the assumption a home will easily sell — as the main driver for the company’s lower-average selling price. But he views the guide for second-quarter gross margin as “encouraging.” Still, Horne warns that while Toll maintained its guidance, it’s important to recognize that it’s “increasingly back-end loaded.”
Adding to the uncertainty, a leading indicator of single-family construction activity showed on Wednesday a strong pullback amid increasing worries over mortgage rates and a number of unsold homes. While Bloomberg Intelligence analyst Drew Reading notes production was likely impacted in part by unfavorable weather, he says spec-home production is likely to moderate given elevated supply in the new-home market and rising inventory in the resale market.
Homebuilders were once a winning trade as appetite for newly-built homes surged with existing homeowners shying away from listing their homes in an unfavorable market. But with borrowing costs still close to 7%, Wall Street is turning its back on the group that rewarded investors handsomely just a couple years ago.
So far this year, shares of homebuilders are down 5% as mortgage and refinancing applications decline, following a 1% drop in 2024. The index gained 85% in the two years through 2021, compared with a 48% advance in the S&P 500 during that time.