Stock Market Today: Dow Sinks More Than 400 Points as Yields Rise to 2024 Highs

Wedbush downgraded shares of five homebuilders on Tuesday, citing seasonal headwinds in what it called the most "normal" year for housing trends since 2019.

The firm downgraded all five stocks to Underperform from Neutral, cutting the target share price of Century Communities (CCS) to $82 from $92, LGI Homes ( LGIH) from $88 to $74, and Meritage Homes Corporation (MTH) from $155 to $148, while leaving DR Horton (DHI) and Lennar (LEN) unchanged.

"In no year," writes Wedush analyst Jay McCanless, "has the residential construction industry followed a precise timetable of a complete uptick in demand in the spring followed by a normal seasonal decline in demand into the summer.

"However, in terms of normal seasonality, 2024 is the most 'normal' year we have seen in the residential construction sector since 2019. As a result, we believe these companies' share prices could see normal seasonal declines as we move into the summer months, especially after the April/May seasonal trading window closes."

Notably, the company kept earnings estimates unchanged for all five stocks.

Since the beginning of the year, all five stocks except Lennar have underperformed the iShares U.S. Homebuilders ETF (ITB), prompting the firm to issue a bearish call.

"We believe this underperformance could worsen if land acquisition and development costs continue to rise and if timber prices continue to appreciate," McCanless wrote.

Higher and longer interest rates and a lack of housing supply have led builders to focus on an underserved segment-entry-level buyers. Builders have used price reductions and incentives to increase sales. But this strategy has put a negative squeeze on gross margins.

McCanless expects the same storyline to play out in the second quarter of the year, as rates on the Reserve Loan are still near the highs of the current cycle. The 30-year fixed-rate loan fell to 6.79% from 6.87% a week ago, according to Freddie Mac.

Many housing economists believe that mortgage rates are likely to fall in the second half of this year as the Fed cuts interest rates. But McAleese doesn't think that's going to happen so mechanically.

"We believe that this remains the market consensus, but we take the opposite view on this side of the coin, as we believe that collateralized loan originators (banks and non-banks) are unwilling to take on prepayment risk without being compensated for it," he noted.

McCanless also pointed out that today the spread between the 30-year resist loan and the 10-year treasury bond is "artificially wider" to account for refinancing risk.