JPMorgan Goes Underweight on These 5 Homebuilders

Despite experiencing a level of heightened volatility since January, the S&P 500 Index has managed to reach new highs, up 9.3% year-to-date (YTD) as the market continues its nearly 10-year bull run. In the meantime, one industry has lagged far behind the rest.

The S&P Homebuilders Select Industry Index is down roughly 10% in 2018, and one team of bears on the Street says the worst is yet to come, as outlined in a recent CNBC story. The 35-stock SPDR S&P Homebuilders ETF (XHB), which tracks the index, is down more than 11% this year. 

(See also: 'Rolling Bear Market' Will Paralyze Stocks for Years: Morgan Stanley.)

Higher Prices, Inventory Levels to Hurt Housing Market

"We expect the housing recovery to remain fairly tepid in 2019," wrote J.P. Morgan analyst Michael Rehaut in a note to clients on Friday. Due to this "more cautious" view of the homebuilding sector, the investment firm downgraded shares of PulteGroup Inc. (PHM) and M.D.C. Holdings Inc. (MDC) to underweight, while moving Beazer Homes USA Inc. (BZH), Century Communities Inc. (CCS) and Meritage Homes Corp. (MTH) down from overweight to neutral. All five stocks closed lower on the downbeat note. 

JPM's note came just a day after a report from the National Association of Realtors indicating that growth in existing home sales for August came in flat and missed estimates. While higher prices hurt sales, a surplus in homes has led to the most inventory on the market in three years. 

Rehaut foresees a build-up in inventories and declining affordability to weigh on the market for the next year. He cited estimates for 150,000 new jobs per month on average in 2019 versus the 207,000 monthly job growth average so far in 2018. 

"We expect builder fundamentals to moderate over the next two years, which include a continued softer order growth rate in 2H18 and gross margins peaking over the next 12 months," added the JPM analyst. 

(For more, see also: 3 Charts That Suggest Homebuilders Are Set to Move Higher.)