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Luxury builders better positioned in rising interest rate environment

Moderate-income market could face headwinds

Construction photo

Market analysts remain confident in homebuilders, with luxury builders expected to lead as rising interest rates freeze out entry-level buyers, analysts say.

Sterne Agee analyst Jay McCanless believes investors should be looking to move-up and luxury homebuilders since households operating on modest incomes are generally the first to bail on housing when mortgage rates rise.

McCanless specifically highlighted the stocks of Ryland Homes (RYL) and Meritage Homes Corp. (MTH) as solid picks. “Our takeaway from this month's data is to continue buying these names because the fundamental backdrop remains positive,” McCanless said of the two stocks.

The 30-year mortgage reached 4.80% this past week, the highest level obtained since April 2011, and more proof that overly competitive rates are slowly becoming a thing of the past.   

Homebuilder stocks overall fell Friday after experiencing a positive run on the HW 30—HousingWire’s exclusive index for mortgage finance and housing stocks.

The dip in share prices followed a strong week for builders – many of which closed in positive territory on Thursday afternoon, only to fall a day later. On Thursday, D.R. Horton (DHI), Lennar Corp. (LEN) and Toll Brothers (TOL), saw their stock prices shoot up on positive gross domestic product and jobless claims data.

D.R. Horton alone rose 3.55% by close on Thursday, only to fall more than 2% by Friday afternoon. Lennar Corp. also fell more than 2% by market close, with Toll Brothers also down 1.86% by market close on Friday.

Despite a weaker close on the HW 30 index for the week, analysts still see homebuilders in a position to benefit from the nascent housing recovery.

"Average sales and inventory trends in the Top 25 markets we monitor continue to improve sequentially and month over month, and we view these indicators as the best barometers of housing demand in our builders' collective footprints," McCanless said.

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