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(Bloomberg) -- Investors are ditching US homebuilder stocks at a record pace as elevated borrowing costs bruise the industry’s prospects and signal that the shares may have further to fall.
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Blows to the sector have come in quick succession. First, data on Tuesday showed confidence among US homebuilders dropped in February to a five-month low. The next day, investors learned that US housing starts slowed in January. Also this week, weak earnings results from luxury builder Toll Brothers Inc. affirmed the dire situation: High interest rates are crushing demand, and the specter of rising costs due to tariffs is snuffing out any hope for profit growth.
Homebuilders are the second-worst performing sector in the S&P 500 Index since President Donald Trump’s election win, sinking 24%. With six more sessions to go in February, a fund tracking the group — the iShares US Home Construction ETF — is poised to mark its largest-ever monthly outflow. The recent weakness follows two years of solid gains when the homebuilding index gained 70% compared to the S&P 500’s 53% advance.
“If you are going to trade, I would not mess around in this sector,” said Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management.
Investor positioning also suggests that traders are bracing for more near-term declines. According to Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, the demand for options that protect against losses in homebuilders is on the rise.
Mortgage rates are currently hovering near 7%, while median prices for new single-family homes are 30% higher than in December 2019. Together, those factors have already battered consumers’ ability to afford housing. On top of that, a potential 25% tariff on imports from Canada and Mexico, and a 10% levy on Chinese goods, threatens to raise prices on building materials.
About 32% of appliances and 30% of softwood lumber come from international trade, according to the National Association of Home Builders.
“Affordability is still restrictive,” said Dennis DeBusschere of 22V Research. “Most of the decrease in housing affordability has been from the increase in home prices,” he wrote in a note to clients on Thursday, adding that mortgage rates falling to 6% would have a limited impact on buying power.