Stocks lost ground Tuesday after a downbeat forecast from high-volume luxury home builder Toll Brothers sent shock waves through the housing sector.
“Home builders like Toll have been strong performers, but may be susceptible to the downside of the housing bubble,” observed Kathleen Shanley, of the bond-analysis firm Gimme Credit.
“We have not been recommending Toll’s corporate debt,” she added, “because of our concerns about a possible downturn in the housing cycle.”
The warning issued by the Horsham, Pa.-based company appeared to crystallize investors’ growing sense of unease over prospects for the sector, which has been white-hot for the last two years but now faces a slowdown as interest rates move higher.
The nation’s housing boom has helped fuel the economy’s expansion, creating jobs in the building trades, at home appliance-makers like Whirlpool and at building-supply companies like wallboardmaker USG.
But the industry’s surge has extended even deeper into the economy. With rates low and home prices soaring, millions of homeowners have garnered huge quantities of cash in recent years by refinancing their mortgages, and they have used that cash to fund economy-boosting purchases of autos, computers and other products.
Two weeks ago, in an appearance before a congressional committee, National Association of Home Builders chief economist David Seiders acknowledged the size of the economic stakes, noting that housing’s “extraordinarily strong performance” has caused some observers to predict “a bust that could wreck not only the housing market but also the entire economy.”
The “housing market inevitably will cool down to some degree before long,” he told lawmakers, “but a destructive housing bust is not in the cards.”
With the Federal Reserve implacably raising short-term interest rates over the past 16 months, Wall Street has known for some time that home builders won’t be able to maintain the furious building pace of recent quarters.
The unanswered question has been whether rising rates and other economic factors will allow the housing sector to ease back from its cyclical peak to a still-strong but more sustainable level, as optimists expect, or whether it will, as sometimes in past cycles, overbuild its way into a major crash.
Toll Brothers’ backlog grew 36 percent, to a record $6.01 billion, in the fiscal fourth quarter ended Oct. 31, Chairman and Chief Executive Robert I. Toll said, and increasingly cautious home-buyer behavior in recent months suggests that the industry “may be entering a period of more moderate home price increases, more typical of the past decade than the past two years.”
Despite his cautious phrasing, Wall Street’s reaction was swift: Toll Brothers shares tumbled nearly 14 percent, to $33.91, and most of its rivals got caught in the sell-off as well.
Meritage Homes fell 11 percent, to $58.27. Pulte Homes slid 9 percent, to $37.77. D.R. Horton, which bills itself as “America’s Builder,” declined 9.3 percent, to $30.60. KB Home tumbled 5.5 percent, to $63.74. M/I Homes dropped 10 percent, to $41.99. Lennar slipped 5.2 percent, to $55.30.
The shakeout also put pressure on construction-sensitive retail giant Home Depot, a Dow Jones industrial average component. It saw its stock decline 2.2 percent, $40.57.
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The negative news from the home builders’ sector wasn’t a surprise, said High Frequency Economics economist Ian Shepherdson, because national data “have been showing rising inventory and slowing price gains for some time now.”
The key question, Shepherdson said, “is whether the existing-homes market–nearly six times bigger than the new-homes market and much more important to retailers of buildings materials, appliances, etc.–also will begin to soften.”
Tuesday’s action: After moving solidly higher for four consecutive sessions, stocks declined as investors absorbed a one-two punch of bad news from Toll and auto parts-maker Visteon.
The Dow, which was off 61 points at one point in the afternoon, ended the day down 46.51, or 0.4 percent, at 10,539.72.
The broader averages also moved modestly lower: The Standard & Poor’s 500 index declined 4.22, or 0.3 percent, to 1218.59. The technology-heavy Nasdaq composite index dipped 6.17, or 0.3 percent, to 2172.07.
After Visteon reported a worse-than-expected third-quarter loss, the company’s shares dropped 14 percent, to $7.72. Automaker General Motors fell 3.7 percent, to $25.86.
Treasury securities rose, reflecting positive trader sentiment about coming major sales of U.S. Treasury bonds. The benchmark 10-year note rose 8/32, to yield 4.56 percent.
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