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Dec. 4, 2018, 4:05 p.m. EST

Home-builder stocks sink after Toll Brothers blames rising rates, negative media for further market slowdown

Toll Brothers attempts to assuage fears by equating current softening in demand to the temporary weakness seen in 2013

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By Tomi Kilgore, MarketWatch


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Shares of home builders took a broad beating Tuesday, after luxury builder Toll Brothers Inc. confirmed investors’ fears by saying it witnessed the housing market “soften further” in November, especially in California, because of reduced affordability and fewer foreign buyers.

In addition to rising interest rates and “significant” price appreciation the past few years giving buyers reason for pause, Toll Brothers /zigman2/quotes/201912487/composite TOL -0.07% also blamed “well-publicized reports” of a housing slowdown for having a negative impact on buyer sentiment.

The SPDR S&P Homebuilders exchange-traded fund /zigman2/quotes/202739297/composite XHB +0.44% dropped 4.5%, with all 35 equity components closing lower, while the iShares U.S. Home Construction ETF /zigman2/quotes/203468436/composite ITB -0.79% slid 4.8% with all 47 components losing ground.

Toll Brothers’s stock slid 1.6%, but pared earlier losses of as much as 10%.

The company reported before Tuesday open fiscal fourth-quarter net income that rose to $311 million, or $2.08 a share, from $191.9 million, or $1.17 a share, in the same period a year ago. The FactSet consensus for earnings per share was $1.84.

/zigman2/quotes/202739297/composite XHB 45.99, +0.20, +0.44%

Sales for the quarter to Oct. 31 increased 21% to $2.46 billion, above the FactSet consensus of $2.36 billion. Meanwhile, net signed contract vale fell 15% to $1.5 billion, while contract units declined 13% to 1,715.

Chief Executive Douglas Yearley said that despite a healthy economy, he saw a “moderation in demand” during the quarter, as net signed contracts declined 15% in dollars and 13% in units. Then things got worse.

“In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,” Yearley said. “California has seen the biggest decline.”

His comments come after a string of disappointing housing market data points, including a surprise decline in construction spending, a drop in pending home sales to a 4-year low, a near 3-year low in new-home sales and the pace of home price growth slowing to a 2-year low. See Economic Report.

/zigman2/quotes/201912487/composite TOL 40.88, -0.03, -0.07%

The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.58% , which provides a guide for mortgage rates, ended October at 3.15%, according to Department of the Treasury data, up from 2.38% a year ago.

The yield as declined since then, to 2.924% on Monday. See Bond Report.

“We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum,” Yearley reminded investors.

Don’t miss : Toll Brothers orders tumble, but housing market comeback may be in the cards.

In 2013, the 10-year Treasury yield rose from 1.86% on Jan. 2 to a 2013 high of 3.04% on Dec. 31, but the SPDR home builder ETF (XHB) still climbed 17.8% that year and the iShares home construction ETF (ITB) rose 9.3%.

So far this year, however, the XHB has shed 22.2% and the ITB has tumbled 28.5%, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.91% has gained 1.0%.

Among some of the more active home-builder shares within the ETFs, PulteGroup Inc. /zigman2/quotes/201694804/composite PHM -0.35% fell 4.4% on Tuesday, D.R. Horton Inc. /zigman2/quotes/202032328/composite DHI -2.80% dropped 4.5%, Lennar Corp. /zigman2/quotes/202536373/composite LEN -1.76% sank 5.7%, KB Home /zigman2/quotes/206220859/composite KBH -2.51% gave up 5.4% and TRI Pointe Group Inc. /zigman2/quotes/204302452/composite TPH +0.97% lost 5.1%.

/zigman2/quotes/201912487/composite
US : U.S.: NYSE
$ 40.88
-0.03 -0.07%
Volume: 2.51M
Dec. 6, 2019 6:30p
P/E Ratio
8.68
Dividend Yield
1.08%
Market Cap
$5.74 billion
Rev. per Employee
$1.50M
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/zigman2/quotes/202739297/composite
US : U.S.: NYSE Arca
$ 45.99
+0.20 +0.44%
Volume: 1.87M
Dec. 6, 2019 8:00p
loading...
/zigman2/quotes/203468436/composite
US : U.S.: Cboe BZX
$ 45.31
-0.36 -0.79%
Volume: 1.95M
Dec. 6, 2019 4:10p
loading...
/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
1.84
+0.03 +1.58%
Volume: 0.00
Dec. 6, 2019 4:59p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,145.91
+28.48 +0.91%
Volume: 1.70B
Dec. 6, 2019 5:07p
loading...
/zigman2/quotes/201694804/composite
US : U.S.: NYSE
$ 40.06
-0.14 -0.35%
Volume: 3.65M
Dec. 6, 2019 6:30p
P/E Ratio
12.21
Dividend Yield
1.20%
Market Cap
$10.86 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/202032328/composite
US : U.S.: NYSE
$ 54.20
-1.56 -2.80%
Volume: 5.00M
Dec. 6, 2019 6:30p
P/E Ratio
12.62
Dividend Yield
1.29%
Market Cap
$19.97 billion
Rev. per Employee
$1.93M
loading...
/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 58.75
-1.05 -1.76%
Volume: 2.95M
Dec. 6, 2019 6:30p
P/E Ratio
9.72
Dividend Yield
0.27%
Market Cap
$18.66 billion
Rev. per Employee
$1.77M
loading...
/zigman2/quotes/206220859/composite
US : U.S.: NYSE
$ 34.19
-0.88 -2.51%
Volume: 1.53M
Dec. 6, 2019 6:30p
P/E Ratio
13.58
Dividend Yield
1.05%
Market Cap
$3.02 billion
Rev. per Employee
$2.37M
loading...
/zigman2/quotes/204302452/composite
US : U.S.: NYSE
$ 15.65
+0.15 +0.97%
Volume: 1.73M
Dec. 6, 2019 6:30p
P/E Ratio
11.81
Dividend Yield
N/A
Market Cap
$2.18 billion
Rev. per Employee
$2.27M
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Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

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