Wall Street worries lead to weakening housing stocks

Analysts reduce price targets as fears of rising interest rates grow

This week, fear of interest rate spikes contributed to a decrease in housing stocks after analysts lowered ratings and price targets for several companies in the housing industry, according to an article written by Jim Bounds for CNBC.

From the article:

Home Depot and Lowe's dropped 4.6% and 3.1%, respectively; Floor & Decor Holdings and Meritage Homes fell at least 4% and KB Home and Lennar pulled back at least 2%.

Two exchange-traded funds that track housing stocks also dropped. The iShares U.S. Home Construction ETF (ITB) fell 2.2% — on pace to post a six-day losing streak — while the SPDR S&P Homebuilders ETF (XHB) declined 1.8%.

The home construction ETF is down more than 9% in October, its worst month since February, on fears about higher interest rates slowing demand. KB Home is down more than 13% this month.

Notably, setbacks in housing starts also resulted in a decrease of housing stocks.

The latest report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development revealed housing starts decreased 5.3% in September, primarily due to volatility in the multifamily sector.

"Our key concern is that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability, and inventory creeps up," Credit Suisse analysts Seth Sigman said in a note. "Why is this important? Home prices have been a key driver of big ticket projects, supporting strong average ticket growth (similar to this point in prior cycles), and driving nearly all of the comps growth as of late."

Freddie Mac’s latest Primary Mortgage Market survey indicated that mortgage rates rose to their highest level in seven years, averaging 4.9% for the week ending Oct. 11, 2018.

“Rising rates paired with high and escalating home prices is putting downward pressure on purchase demand,” Freddie Mac Chief Economist Sam Khater said in the report. 

This is supported as the Mortgage Bankers Association’s Weekly Mortgage Applications Survey showed that on an unadjusted basis, the Mortgage Composite index declined 7% from the previous week.

Despite recent criticism of the rising interest rate environment, the Federal Reserve is still expected to raise rates at least once more in 2018.

Last week, President Donald Trump blamed the stock market's disturbances on the Federal Reserve’s rate hikes.

"The Fed is making a mistake," Trump said. "I think the Fed has gone crazy."

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