IB Traders’ Insight

View The Latest Videos View Videos


Interactive Brokers - D.R. Horton Stock Heads South as Interest Rates Climb

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%.

The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.



We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.