Homebuilder ETFs weakened Friday after J.P. Morgan analysts downgraded a number of home construction companies on a pessimism over housing market fundamentals.
On Friday, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) dipped 0.2%, iShares U.S. Home Construction ETF (NYSEArca: ITB) fell 0.7% and PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB) dropped 0.7%, with both XHB and PKB testing their short-term support at the 50-day simple moving average.
The homebuilder sector weakened, following J.P. Morgan’s stated it was “more cautious” about the sector’s prospectus, CNBC reports.
J.P. Morgan’s Michael Rehaut lowered its ratings on five homebuilders Friday, including reducing PulteGroup and M.D.C. Holdings to underweight and downgrading Beazer Homes, Century Communities and Meritage Homes shares to neutral from overweight.
“We are becoming more cautious on the homebuilding sector,” Rehaut said in a note. “We expect the housing recovery to remain fairly tepid in 2019.”
Consumer Confidence: Not Sustainable?
While the broader economic indicators remain positive, the economy is slowing and the current levels of consumer confidence are not sustainable. The analyst argued that rising inventories of new homes and falling affordability will depress home prices over the next year. Furthermore, Rehaut cited J.P. Morgan’s lower growth projection of 150,000 jobs per month on average for 2019, compared to the 207,000 monthly job growth average so far this year, as a potential contributing factor to lower demand.
“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,” Rehaut said.
Furthermore, mortgage rates have increased to a four-month high and housing stats rose more than expected in August, but builder permits, an indicator for future activity, declined at the fastest rate since May 2017, MarketWatch reports.
“Ultimately, though, while valuation may have begun to limit incremental downside risk in the group…we believe a combination of improved fundamentals and alleviated cyclical concerns are necessary for any material rebound in the group,” Rehaut added.
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