“This construction pullback is not due to lack of demand, and instead seems born out of builders’ fears that it’s almost impossible for them to profitably deliver new homes at a lower price points where that demand is strongest,” Zillow analyst Aaron Terrazas wrote.
Materials costs have recently eased, but the sector is still struggling with soaring labor costs, according to the analyst.
“Rising mortgage interest rates, tax changes and an aging recovery have also snowballed, putting a meaningful dent in what buyers can afford to pay,” Terrazas said. “Having turned a corner in 2018, the critical unknown for 2019 will be whether this builders’ retreat will prove to be prescient or premature.”
Meanwhile, Stephen Kim of Evercore ISI sees the slowdown as a pause, not a turn in the cycle.
‘‘Overall, it seems we are transitioning into a period where ‘bad news is no news’,’’ he wrote in a note in October ‘‘And while we cannot say exactly where the bottom in this volatile group will occur, we would rather buy the stocks a few weeks early than a few days late.’’
‘Sticker Shock’
“Higher rates are giving home buyers sticker shock and making existing owners reluctant to give up their historically low-rate mortgages,” Kim wrote. “But a slowdown where people choose to stay is far better than one where they are forced to move.’’
BTIG analysts led by Carl Reichardt forecast a ‘‘harsh winter’’ for homebuilders after the firm released its monthly BTIG/HomeSphere Homebuilder Survey in November, which solicited the perspective of 83 small and mid-sized tract homebuilders nationally about sales, customer traffic and cost trends.
Reichardt and his team, however, said that ‘‘builders with entry-level exposure appear to be faring better than those with more move-up/luxury focus.”
Demographic Tailwinds
Some investors may have already started pricing in a recessionary environment for 2019. But Bloomberg Intelligence analyst Drew Reading said that slower growth is more likely than a recession.