Homebuilders Rally Stalls After D.R. Horton Disappoints Bulls

The rally in homebuilding stocks has hit a stumbling block after results from industry bellwether D.R. Horton Inc. missed some lofty investor expectations.

(Bloomberg) — The rally in homebuilding stocks has hit a stumbling block after results from industry bellwether D.R. Horton Inc. missed some lofty investor expectations. 

A sector benchmark, which has logged gains in six of the past seven weeks, is dipping once again as Wall Street ponders if stock prices have gotten too rich as homebuilding stocks hit new heights amid robust housing demand and lean inventory. 

D.R. Horton, which targets the entry-level housing market where inventory scarcity is most pronounced, blew away estimates but fell short on bullish expectations for new orders, according to Wall Street analysts. Shares fell 1.9% Thursday after opening at a record of $132.30, eclipsing a prior peak set just last week.

Company commentary on upcoming orders and demand was mixed, according to Tyler Batory, an analyst at Oppenheimer & Co. Investors “might make the argument this is as good as it can possibly get,” he said. 

In the three months through June, D.R. Horton’s purchase contracts jumped 37% from a year earlier to 22,879. While those orders beat estimates, JPMorgan analysts said they missed the bull-case among investors. 

Before this week’s slump investors had been flocking to the sector in droves as builders continued to take market share from previously-owned homes and smaller private homebuilders. A gauge of sentiment for the group rose to the highest level in more than a year in July as buyers opted for newly constructed properties. 

With valuations still elevated, sector headwinds like rising interest rates and lingering scarcity of building materials pose a threat. Rate cuts could also hurt homebuilders as existing homeowners are likely to re-enter the market. 

And despite elevated demand, just 1% of the nation’s homes have swapped hands this year — the lowest share in at least a decade, according to a report from Redfin Corp. Wednesday. 

“The increase in present sales and buyer traffic is perhaps not surprising following better-than-expected housing data year-to-date,” Citigroup Inc. analysts led by Anthony Pettinari wrote in a note to clients Tuesday. “However, the prospective buyer traffic index remains well below the positive threshold.”

Amid an over 40% rally in D.R. Horton this year, traders have been in no rush to pile on hedges to guard themselves against losses. Earlier this week, the cost of contracts protecting against a 10% decline in the stock in the next month relative to bets for gains of the same magnitude fell to the lowest level since March, data compiled by Bloomberg show.

D.R. Horton’s earnings had other positives as the building firm promised further improvements to the time it took to construct a home.

“If you can sell and home and then close the home in the same quarter, that’s going to juice your earnings,” said Batory. “This is why builders, especially D.R. Horton, were crushing estimates earlier this year — cycle times have gotten a bit better. How long it takes to build a home has improved.”

With faster construction times, builders are able to build, sell and close a home in the same quarter, providing upside to earnings, Batory added.

For now, the sector is on track to notch its second weekly loss this month with the S&P Composite 1500 Homebuilding Index falling 3.5% Thursday, the biggest one day drop since November.

PulteGroup Inc. and NVR Inc. are the next to report, with their latest earnings results scheduled to be released on Tuesday. 

–With assistance from Elena Popina.

(Updates with closing prices.)

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