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Housing stocks fell Wednesday morning in the wake of new government data signaling a weak recovery in new residential construction.
The SPDR S&P Homebuilders ETF (XHB) fell 1% while DR Horton, Inc.DHI), the largest U.S. homebuilder, fell nearly 2%, and Lennar (LEN) and Toll Brothers (FOR ME) dragged by 2% during morning trading.
Construction of single-family and multi-family homes recovered modestly in April from the previous month, but fell year over year and was lower than expected as rising mortgage rates dampened real estate activity.
Private housing starts in April reached a seasonally adjusted annual rate of 1.36 million, an increase of 5.7% from the revised rate in March but a decline of 0.6% from the same period a year ago , according to the Census Bureau data released Thursday. Economists surveyed by Bloomberg expected a rate of 1.42 million.
“The recovery was not as strong as we had anticipated, which potentially casts some doubt on our above-consensus forecast for housing construction,” wrote Thomas Ryan, economist at Capital Economics, in a note following the release.
This is because builders are not very confident about the housing market as mortgage rates have remained above 7%. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell to 45 in May, six points below the April value, marking the first decline since November 2023. Any number below 50 indicates that more builders see conditions as poor rather than good.
Despite builders’ gloomy expectations, Ryan predicts that single-family construction could rise to 1.11 million this year, “as builders capitalize on the lack of second-hand homes on the market, which has shifted demand to new construction.”
However, some of that strength could be offset by weaker movement in multifamily construction, potentially leaving total housing starts at 1.43 million by the end of the year, Ryan said.