Shaina Mishkin

Mounting headwinds in the housing market have both investors and builders hitting pause. Home builder stocks are on track for their worst February since 2020.

Investors looking for signs of life ahead of the typically busy spring homebuying season were disappointed this week. Data, earnings, and commentary suggest the housing market this year got off to a slow start.

February typically isn't a great month for home builder stocks. The iShares U.S. Home Construction exchange-traded fund, which tracks home builders and related companies, falls an average of 1.3% in February before climbing in March and April, according to Dow Jones Market Data.

But this year's performance is particularly bad. The fund is down 6.3% this month so far, according to Dow Jones Market Data. If that loss holds, this will be its worst February since 2020, when fears about the spread of Covid-19 began to shake both builders and the broader market alike.

Weighing on the stocks is the fear of a double whammy for builder margins: If land, material, or labor costs increase, and rates stay high, keeping demand constrained, "that creates a situation where you have flattish sales, but margins compressed," says BTIG analyst Carl Reichardt, Jr.

Shares of luxury home builder Toll Brothers closed at their lowest price since July, according to Dow Jones Market Data. The stock ended Wednesday down 5.9% after the builder reported earnings the day before that missed expectations.

Toll Brothers "may be pumping the brakes a little bit" on beginning new construction on some types of homes in places where inventory is rising, CEO Douglas C. Yearley, Jr., said on a conference call. "On a net basis, we do expect to reduce overall spec starts in the near term," Yearley said. A spec, or speculative, home is one started before it is sold to a buyer, as opposed to homes that are sold before construction begins.

Toll Brothers isn't the only builder pulling back. Housing starts, a measure of new-home construction, fell further than expected in January, according to government data released Wednesday.

A gloomy read on home builder sentiment suggests that construction is in no hurry to ramp up: an index published by the National Association of Home Builders earlier this week dropped in February as the industry significantly lowered their expectations for sales over the next six months.

"High construction costs, elevated mortgage rates and challenging housing affordability conditions are causing builders to approach the market with caution," Carl Harris, the National Association of Home Builders' chairman, said in a Wednesday statement. "The uncertain policy environment in terms of a better regulatory climate and impending tariffs offers both upside and downside risks in the near-term."

Fewer homes constructed today could translate into quicker home price gains tomorrow. If housing starts keep falling, "new available housing -- for-sale or for-rent -- could peak this year, well short of expectations," Orphe Divounguy, a Zillow senior economist, wrote in response to Wednesday's home construction data. That could cause both multifamily valuations and home prices to heat back up, he adds.

"If home prices and rents start accelerating again, it could make affordability an even bigger hurdle for renters and potential home buyers -- especially first-time buyers already struggling with high mortgage rates," he says.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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February 19, 2025 16:54 ET (21:54 GMT)

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