Investors had hoped that the one-day pop in the stock market might last more than, well, a single day. Unfortunately, those hopes proved to be too optimistic. Stock market indexes opened the day sharply lower and never managed to recover. The Dow Jones Industrial Average (^DJI 0.26%), S&P 500 (^GSPC 0.61%), and Nasdaq Composite (^IXIC 0.93%) were all down as much as 4%, with the S&P falling to levels last seen in December 2020.
|
Index |
Daily Percentage Change |
Daily Point Change |
|---|---|---|
|
Dow |
(2.42%) |
(741) |
|
S&P 500 |
(3.25%) |
(123) |
|
Nasdaq |
(4.08%) |
(453) |
Data source: Yahoo! Finance.
Many of the declines among stocks have come from the technology sector where extremely high valuations have pulled back dramatically. Yet as time has gone on and new macroeconomic factors have come into play, other industries have also shown weakness. On Thursday, homebuilder stocks were the primary victims as economic data showed weakening conditions that could pose problems going forward.
Homebuilders get blown over
Just about the entire homebuilding industry saw their shares fall sharply on Thursday. Beazer Homes (BZH +0.00%) led the way lower with a 17% drop by the end of the day. Other double-digit declines among well-known industry players included Hovnanian Enterprises (HOV +0.78%) and Meritage Homes (MTH +0.35%), both down 10%.
NYSE: BZH
Key Data Points
Leaders in the space saw somewhat less extreme drops, but they were still far worse than the overall market's performance. PulteGroup (PHM 1.10%), LGI Homes (LGIH +0.41%), and KB Home (KBH 0.36%) were all down 8% on the day. Lennar (LEN +2.62%) fell 7%, and both Toll Brothers (TOL 1.06%) and D.R. Horton (DHI +0.97%) saw their shares drop 6%.
The immediate cause for concern among homebuilders was data that indicated a major slowdown in industry construction activity during the month of May. Housing starts dropped a whopping 14.4% in a single month, coming in at an annual rate of 1.549 million units for the month. That was far worse than the 1.7 million units that most economists had expected.
Meanwhile, the immediate future doesn't look promising either. Housing permits for planned construction also fell sharply, declining 7% to an annual rate of 1.695 million.
Higher interest rates are putting on the pressure
From a broader perspective, the situation in the mortgage loan market has had a clear impact on the actual cost of housing for the bulk of would-be homeowners. The rate on the 30-year fixed mortgage moved up more than half a percentage point, surpassing the 5.75% mark for the first time since 2008.
Higher mortgage rates make it harder for homebuyers to afford the homes they want. So far, home prices have remained high, and so the monthly cost to finance a home is going up as rates climb. The last thing homebuilders want is a big supply of homes that they can't sell because there aren't enough prospective buyers who can afford them.
In addition, from a supply standpoint, homebuilders face other business challenges. Getting qualified labor at affordable rates has become increasingly difficult for the industry. Costs of materials have been on the rise as well, pressuring margins right at the time that buyers might be looking to economize.
To be fair, these are exactly the impacts that monetary policymakers at the Federal Reserve have anticipated by raising rates. However, the Fed can't control supply-side issues. More importantly, policymakers probably didn't anticipate that the impact would come this quickly after beginning what could be an extended cycle of interest rate hikes throughout the rest of 2022 and into 2023.
Investors have to keep an eye on the impact that macroeconomic factors will have on the stock market. In housing, shareholders of homebuilders are seeing that impact sooner rather than later, but other industries are likely to experience similar pressures in the months to come.
