The housing market is in a tricky spot right now. Higher interest rates are causing problems and distortions in the market. With the average interest rate charged on a home mortgage in the U.S. now above 7%, existing home sales have all but collapsed. However, new home construction is booming right now, having risen more than 20% in June of this year from the same month in 2022. This is because existing homeowners are reluctant to sell and give up the locked-in interest rate on their house that is much lower than current rates. That sounds like good news for homebuilder stocks right?
But will the boom in new home construction last? There are growing concerns that interest rates staying higher for longer will push the U.S. economy into a recession, dragging both the residential and commercial real estate markets down with it. Here are some homebuilder stocks that are ticking time bombs. Its time to dump them from your portfolio before the damage is done.
Toll Brothers (TOL)
There’s a couple of reasons to proceed with caution regarding Toll Brothers (NYSE:TOL). First of all, the company both builds and arranges the financing of residential and commercial properties in the U.S. It’s wide exposure across the entire home building and construction process makes it especially vulnerable should the market head south. If history has taught us anything it’s that financing and mortgage lenders tend to take it on the chin when the housing market goes into recession or crashes.
The second area of concern should be the fact that TOL stock has been on a monster run over the last year. In the past 12 months, Toll Brothers’ share price has increased 80%, driven largely by accelerating demand for the new properties it sees through from initial design to the construction and financing. The red hot rally should make investors weary of getting in at the top only to see the share price plunge should the bottom fall out of the residential and commercial real estate markets.
Masco Corp. (MAS)
In business since 1929, Masco Corp. (NYSE:MAS) manufacturers popular products used in new home construction throughout the U.S. These products include faucets, showerheads, cabinet hardware and toilets, among other items. As one might expect, right now is boom times at Masco and the company’s stock has gained 14% in the last 12 months. Over five years, the share price is up 43%. But, the company is vulnerable to boom-bust cycles.
Masco has certainly been here before. The company’s share price collapsed and was trading in penny stock territory in 2009 after the last U.S. housing bubble burst and we entered the Great Recession. While the company and its stock have clawed their way back over the last decade, they could be negatively impacted if interest rates push the housing sector and broader economy into a recession in 2024. The company also has massive overhead with more than 25,000 employees and 90 manufacturing facilities worldwide.
D.R. Horton (DHI)
Warren Buffett might have taken a position in D.R. Horton (NYSE:DHI), but does that mean you should? DHI is highly exposed should demand for new home construction falter. And since it was disclosed that Buffett has taken a shine to homebuilders, DHI stock has declined 6%. The company’s share price is still up nearly 60% over the last 12 months, but signs are emerging that the stock is cooling off after a hot streak.
It’s also notable that Buffett’s stake in DHI stock is comparatively small, comprising just 0.2% of his portfolio and worth a total of $645 million. Anything under $1 billion is a pretty small investment for the Oracle of Omaha. With home construction activity in 29 states, D.R. Horton will no doubt be seriously impacted should the housing market swoon. The company also just named Paul Romanowski as its new president and CEO. It is risky undertaking a leadership transition at the highest levels during a sensitive time for the economy and markets. This is among homebuilder stocks where it is wise to proceed with caution.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.