Lending markets

Markets hit their lowest level in 18 months as this industry was hit hard on Thursday

Investors had hoped the stock market’s one-day rise could last longer than a day. Unfortunately, those hopes turned out to be too optimistic. Stock indices opened the day down sharply and never managed to recover. The Dow Jones Industrial Average (^ DJI -2.42%), S&P500 (^GSPC -3.25%)and Nasdaq Compound (^IXIC 0.00%) all fell as much as 4%, with the S&P falling to levels last seen in December 2020.


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Data source: Yahoo! Finance.

Many of the declines in stocks have come from the technology sector, where sky-high valuations have fallen dramatically. Yet, as time passed and new macroeconomic factors came into play, other industries also showed weakness. Homebuilder stocks were the main victims on Thursday as economic data showed weakening conditions that could pose problems going forward.

Home builders get knocked down

Just about the entire homebuilding industry saw its shares fall sharply on Thursday. Beazer Homes (BZH -16.93%) led the way lower with a drop of 17% at the end of the day. Other double-digit declines among well-known industry players include Hovnan companies (MOV -10.42%) and Meritage Homes (MTH -9.82%)both down 10%.

The space leaders saw somewhat less extreme declines, but they were still much worse than the overall market performance. Pulte Group (MPH -8.01%), LGI houses (LGIH -7.86%)and Knowledge base home (KBH -8.05%) were all down 8% on the day. Lennar (LEN -6.50%) fell 7%, and both Toll Brothers (TOL -6.31%) and DR Horton (DHI -6.33%) saw their shares fall 6%.

The immediate cause for concern among homebuilders was data that indicated a major slowdown in the industry’s construction activity during the month of May. Housing starts fell 14.4% in a single month, hitting an annual rate of 1.549 million units for the month. That was far worse than the 1.7 million units most economists expected.

Meanwhile, the immediate future doesn’t look promising either. Housing permits for planned builds also fell sharply, falling 7% to an annual rate of 1.695 million.

Rising interest rates put pressure

From a broader perspective, the situation in the mortgage market has had a clear impact on the real cost of housing for the majority of homeowners. The 30-year fixed mortgage rate rose more than half a percentage point, topping 5.75% for the first time since 2008.

Higher mortgage rates are making it harder for buyers to afford the homes they want. So far, house prices have remained high, and so the monthly cost to finance a house increases as rates go up. The last thing homebuilders want is a large amount of homes that they can’t sell because there aren’t enough potential buyers who can afford them.

Additionally, from a supply perspective, homebuilders face other business challenges. Obtaining skilled labor at affordable rates has become increasingly difficult for the industry. Material costs have also risen, putting pressure on margins just when buyers might be looking to save money.

To be fair, these are exactly the impacts that Federal Reserve monetary policymakers anticipated by raising rates. However, the Fed cannot control supply-side issues. More importantly, policymakers likely did not anticipate the impact to occur so quickly after the start of what could be a prolonged cycle of interest rate hikes throughout 2022 and into 2023.

Investors should keep an eye on the impact that macroeconomic factors will have on the stock market. In housing, homebuilder shareholders are seeing this impact sooner rather than later, but other industries are expected to come under similar pressure in the months ahead.