The Housing Market Is Losing Buyers. Homebuilder Stocks Are Feeling the Pain
Housing is one of the most interest-rate-sensitive corners of the US economy. When borrowing costs climb, buyers pull back and the companies building homes tend to feel it quickly.
That pressure is building again. Mortgage rates just made their biggest weekly jump in years, home sales are weakening, and Wall Street is getting more cautious on the builders most exposed to another housing slowdown.
Mortgage rates jumped again
Freddie Mac’s weekly survey put the 30-year fixed rate at 7.28% on Oct. 1, up from 7.03% a week earlier. That 25-basis-point increase was the largest weekly jump since October 2022.
A year earlier, the average mortgage rate stood at 6.34%. The latest move pushes borrowing costs even further above those levels, making monthly payments more expensive for buyers already dealing with elevated home prices.
The bond market is driving much of the pressure. A sustained Treasury selloff has pushed long-term yields higher, dragging mortgage rates along with them.
Buyers are pulling back
Higher borrowing costs are already showing up in demand. Existing-home sales fell 2.5% from a year earlier in September, according to Zillow’s preliminary nowcast.
The forward-looking numbers were worse. Newly pending sales, which offer an early look at future closings, dropped 8.5% year over year.
Home prices haven’t collapsed alongside demand. The Zillow Home Value Index is still up 1% over the past year, leaving buyers squeezed between stubborn prices and much higher financing costs.
The typical mortgage payment is now 6.7% higher than a year ago, assuming a 20% down payment and excluding taxes and insurance.
Renters are seeing less pressure by comparison. Typical US rents increased 2.7% year over year in September, leaving the rental market considerably steadier than the for-sale market.
Homebuilder stocks are sliding
Investors aren’t waiting for housing data to deteriorate further. The iShares U.S. Home Construction ETF hit a 52-week low last week.
Its 50-day moving average has also slipped below its 200-day average, another sign of how much momentum has deteriorated across the group.
Lennar followed with a 52-week low on Oct. 5, finishing among the S&P 500’s weakest performers.
The selloff came as the 10-year Treasury yield reached its highest closing level since 2002, putting another round of pressure on rate-sensitive stocks.
Lennar has another issue hanging over it. Short seller Hunterbrook alleged on Oct. 2 that the builder sold roughly 700 homes worth $200M to its Millrose Properties spinoff to help meet quarterly targets.
Wall Street is getting cautious
Morgan Stanley added to the pressure this week when it launched coverage of major US homebuilders with a cautious outlook for the industry.
Toll Brothers was the standout. The bank started the stock at Overweight with a $159 price target, making it the only builder in the group to receive a positive rating.
Lennar, NVR, and KB Home were initiated at Underweight, while D.R. Horton and PulteGroup received Equal Weight ratings.
Morgan Stanley analyst Adam Kramer pointed to some improvements across the industry. Builders have gained market share, reduced debt, and moved toward land-light strategies that have helped cash flow and share buybacks.
The problem is what comes next. Elevated inventory, falling median new-home prices, and worsening affordability are all weighing on the outlook.
Morgan Stanley expects both closings and average home prices to remain roughly flat in 2027, while gross margins deteriorate by around 50 basis points. Its 2027 and 2028 earnings estimates are roughly 9% below consensus across all six builders, despite analysts already cutting forecasts.
Rates still run the trade
Homebuilders can look cheap quickly when their stocks fall, but valuation alone doesn’t remove the biggest risk facing the group.
If long-term Treasury yields stay elevated, mortgage rates have little room to fall meaningfully. That keeps monthly payments high, makes buyers more reluctant to enter the market, and puts additional pressure on builders to use incentives or lower prices to keep homes moving.
Toll Brothers offers a different setup because its customers are less dependent on financing, helping explain Morgan Stanley’s preference for the stock. But that is a company-specific argument rather than a bullish call on housing overall.
Zillow expects home sales to keep declining through the rest of the year. For investors looking at homebuilders, the first question isn’t whether the stocks look cheap. It’s whether they think rates are finally ready to come down.
