Sector Snap: Homebuilder shares tumble

Alex Veiga, AP Real Estate Writer
Associated Press

LOS ANGELES (AP) -- Homebuilder stocks fell sharply on Thursday, as one major builder reported weaker-than-expected new home orders and another said customer traffic slowed last month as mortgage rates began to rise. That stoked investor concerns that rising interest rates could hold back the pace of the housing recovery.

PulteGroup Inc. led the decline, plunging 11 percent after reporting a 14 percent drop in second-quarter profit and 12 percent slide in new home orders versus a year earlier.

Rival D.R. Horton Inc. reported strong sales growth for its fiscal third quarter, but CEO Don Tomnitz told Wall Street analysts during a conference call that the company saw the pace of sales decline starting in May — when mortgage interest rates rose sharply. The builder's shares fell nearly 9 percent in afternoon trading.

"The sell-off, a lot of it is about the interest rate," said David Williams, analyst with David Williams Financial Group. "There has been a lot of speculation about interest rates and dampening of demand really slowing the (turnaround) here."

Average rates on U.S. fixed mortgages reached a two-year high of 4.51 percent two weeks ago, following increases in the yield on the 10-year Treasury note. The yield rose sharply last month after Federal Reserve Chairman Ben Bernanke said the central bank might begin reducing the amount its spends each month on bond buybacks.

It has since stabilized after Bernanke and other Fed members have stressed that any change in the bond purchases are contingent on the economy's health.

As a result, average rates on fixed mortgages have declined the past two weeks.

Still, the uptick in recent weeks appears to have given some would-be homebuyers reason to hold off on purchases while they assessed whether rates might dip again.

Williams expects a pullback on sales to be temporary, saying he doesn't believe buyers overall expect that interest rates will ever return to rock-bottom levels.

"If you're a homebuyer, then you're still faced with tremendous affordability today compared to what it could be if we're looking even just six months down the road," he said.

Another factor weighing on builder stocks may be that some investors have decided that it's time to pull back from the sector, which saw stock prices climb sharply as the housing market began to rebound last year.

Now, most of the companies are down year to date.

"Most of the builders are down or slightly up, and I think a lot of it is that enthusiasm is beginning to wane and we're starting to get to the part of the cycle where visibility of earnings is a little more linear," Williams said.

Here's how some homebuilders are faring in afternoon trading:

Pulte Group fell $2.16, or 11.7 percent, to $16.29.

D.R. Horton declined $1.88, or 8.9 percent, to $19.31.

Lennar Corp. slipped $1.39, or $4 percent, to $32.54.

KB Home shed $1.20, or 6.7 percent, to $16.80.

Toll Brothers Inc. fell 97 cents or 3 percent, to $31.34.

Hovnanian Enterprises Inc. slid 20 cents, or 3.6 percent, to $5.34.

M/I Homes fell $1.55, or 6.9 percent, to $20.88.

Ryland Group Inc. declined $3.52, or 8.9 percent, to $36.22.

Standard Pacific Corp. slipped 46 cents, or 5.6 percent, to $7.75.