Homebuilders Brace For Weaker ’19, Cut Prices To Lure Buyers

Investors in U.S. homebuilders are holding their breath heading into the New Year as experts predict softening demand in 2019, mainly driven by higher borrowing costs.

Gradual interest rate hikes by the Federal Reserve helped slow the housing market in the second half, with weakness starting over the summer and becoming more pronounced in the fall. Confidence among U.S. homebuilders has plummeted to the lowest level since 2015, signaling that the industry’s struggles are intensifying, data released Monday showed.

To lure buyers, homebuilders are cutting prices. This is adding to margin pressures in an industry that’s yet to see any meaningful relief in development costs or prices for building materials, financing and labor, according to a report from Wells Fargo.

‘‘Sales of new and existing homes and new home construction continue to come in below expectations, and most of the leading indicators show the trend is likely to continue and perhaps intensify,’’ Wells Fargo analysts led by Mark Vitner wrote.

The hurdles facing homebuilders are unlikely to relent soon and home sales and new home construction should continue to underperform the broader economy, according to the Wells Fargo report. The S&P 1500 Homebuilding group is down 31 percent this year compared with a 3.9 percent decline in the S&P 500 Index.

Homebuilder ETFs

Investors have also been yanking cash from exchange-traded funds tracking builders. The $811 million iShares U.S. Home Construction ETF, ticker ITB, has seen more than $1.2 billion worth of outflows this year, putting the largest fund tracking the industry on pace to lose the most assets since it started in 2006.

The $601 million SPDR S&P Homebuilder ETF, ticker XHB, has also bled cash, with investors pulling about $383 million this year. The fund’s share price has fallen 26 percent in 2018, compared with a 31 percent decline for ITB, because it equally weights its holdings rather than basing it on market capitalization, reducing exposure to some of the larger builders and boosting the presence of smaller firms that have done better.

The residential construction market hit the pause button in 2018 with permits, starts and completions--the three headline construction indexes--on track to close the year on a sour note, according to a report from Zillow.