US homebuilders retreat after Barclays downgrades

The vigorous rally this year for US homebuilders is built on an increasingly shaky foundation, Barclays warned on Tuesday, weighing on shares of several large groups in the industry.

Analyst Michael Dahl cut Lennar, PulteGroup and Tri Pointe Group to “equal weight” while hitting luxury builder Toll Brothers with an “underweight” rating.

All four stocks have posted large gains in 2017, ranging from a 34 per cent rise at Pulte and a 16.7 per cent increase at Tri Pointe.

Investors have bid up the sector given the strength in the housing market, strong returns in the stock market that have boosted wealth and low inventories of previously owned homes.

In fact, Mr Dahl believes the rate of the start of new single-family home construction will rise 9 per cent in 2017 and 8 per cent the following year.

“This is not a bearish call on housing,” he said, noting, however, that “our views on housing and homebuilder stocks are not always one and the same”.

Mr Dahl pointed to a Barclays survey showing that buyer traffic moderated last month, suggesting that “demand trends have started to decelerate”.

“Agents blamed a combination of worsening affordability and lack of quality inventory,” he said.

At the same time, homebuilders face “continued land and labour pressures” and material-cost headwinds that could weigh on profit margins, Mr Dahl said.

“At minimum, builders appear to face a high bar over the next several months to justify these higher valuations,” he added.

Pulte fell 1.6 per cent by the close of trading in New York to $24.67, Lennar slid 1.5 per cent to $53.73, Tri Pointe declined 0.7 per cent to $13.40 and Toll Brothers fell 1.9 per cent to $40.19.

Meanwhile, the broader equities market was mixed as the Trump Russia controversy deepened with Donald Trump Jr tweeting an email exchange with a Russian lawyer, and investors were eagerly awaiting commentary due on Wednesday from the Federal Reserve chair, a heavy slate of earnings and the beginning of the corporate reporting season.

The S&P 500 fell 0.1 per cent to 2,425.53, the Dow Jones Industrial Average was flat at 21,409.07 and the Nasdaq Composite gained 0.3 per cent to 6,193.30.

“Markets still appear to be cautiously awaiting [Janet Yellen’s] testimony to Congress tomorrow and a several key data points on Friday, including June [consumer price index] readings and the start of second-quarter earnings season for the banks,” said Peter Cecchini, head of equities derivatives at Cantor Fitzgerald.

Stock traders were also eyeing shares in the latest batch of US initial public offerings that have fared poorly since making their stock market debuts.

Snap, the parent of Snapchat, tumbled 9 per cent to $15.47 after getting hit with a Morgan Stanley downgrade. It is now trading below the $17 that it floated shares at in March.

Meal-delivery service Blue Apron also dropped 12.3 per cent to $7.14, below its June offer price of $10.