By Steven Levine

Shares of US-based homebuilder D.R. Horton (DHI) continued to sink Wednesday after a recent uptick in interest rates and lower-than-expected housing starts weighed on the company.

Since mid-December 2017, the value of DHI’s stock has fallen nearly 9.25% compared to the iShares US Home Construction ETF (ITB) and has plunged over 21% from its five-year high of around US$52.00 set in early January 2018.

The activity falls at the heels of rising interest rates, which typically bodes poorly for the housing market. The yield on the 10-year US Treasury note rose to a high Tuesday of about 3.095%, its highest level since 2011, following positive retail sales data.

While the equity market generally embraces stronger US economic data, including healthy retail sales, upbeat consumer confidence, an improved labor market and modest signs of inflation, it frets a potential further flattening of the yield curve, which could trigger a correction. A more positive US economy could also spur the Federal Reserve to hike rates at a faster clip than what the market has currently priced-in.

Neil Azous at Rareview Macro noted that given the degree of the short positioning in US fixed income, “it should be no surprise” that the professional community’s consensus view Wednesday morning is that the yield on the 10-year US Treasury note “formally adjusted to a new higher range.”

On the housing front, some analysts think an increase in mortgage rates and a revision to the tax treatment for mortgage interest deductions could help put negative pressure on affordability and weaken demand.

Although fundamentals underpinning the housing market may be sound, it is against this landscape that the real estate sector has been dragging down the performance of the broader S&P 500 (SPX) index.  

In late morning trading Wednesday, the SPX had gained just under 0.3%, with the real estate sector off 0.3%, the second worst performer behind the rate-sensitive utilities industry, which had shed 0.65% on the day.

Meanwhile, housing starts fell 3.7% in April to roughly 1.29m from an upwardly revised 1.34m in the prior month. The latest figure also slipped below expectations for 1.325m, with the number of homes under construction flat from the previous month, but up just under 4.5% year-on-year. 

Amid slower construction and rising rates, the market’s perception of the creditworthiness of certain homebuilders and home improvement retailers – including DHI, Lennar Corp (LEN), Home Depot (HD) and Lowe’s Companies (LOW) – has recently diminished.

Recent quotes on 5-year CDS spreads on these real estate-related firms has widened by varying degrees:

For its part, DHI had updated its fiscal 2018 guidance for a pre-tax profit margin of between 12.1-12.3% from 11.8-12.0% previously, with revenues in the range of US$15.9bn-16.3bn.

In DHI’s fiscal Q2’18, the company posted a 53% year-on-year rise in net income to US$351m or US$0.91 per share, with pre-tax income up 26% and a pre-tax profit margin improvement of 80bps to 11.7%.