Housing Stocks Hit by Rising Mortgage Rates

May 23, 2018 — 2:33 PM EDT

Rising mortgage rates aren't only shutting would-be buyers out of the real estate market – they are also pressuring the stocks of companies in that sector.

During 2017, housing-related stocks were surging along with everything else in the stock market, but this year, they have been one of the worst performing groups, with Seeking Alpha pegging the decline in stock prices in the sector at more than 10% year to date. While investors may brush this off as a correction after the strong showing in 2017, others point to rising mortgage rates, increasing real estate prices and a dearth of affordable properties as the main culprits for the decline in the share prices.

[Check out Invetopedia's mortgage calculator to see how much home you can afford.]

After all, since the start of this year, mortgage rates have been marching higher, making it more expensive for home loan borrowers. The rise in rates comes at the same time that property values are increasing and demand is surging, resulting in price wars breaking out in some parts of the country. First-time buyers tend to be more price sensitive. Even a slight uptick in mortgage rates and property values could shut them out of the market altogether. The same goes for lower-income buyers. With home prices continuing to march higher, buying a home simply isn't affordable for many people. For the week ending May 18, the Mortgage Bankers Association found that mortgage applications declined 2.6% from the week earlier, with the refinance share of mortgage activity decreasing to 35.7% of total applications from 35.9% in the prior week.

All of that housing data, in turn, put pressure on companies that play in the real estate market. Slower home sales affect everything from lenders to home builders, and as a result, some of the stocks in the sector have been slumping. For example, the stock of homebuilder Lennar Corporation (LEN) is 25% lower since the start of the year, while rival D.R. Horton, Inc. (DHI) is down around 19%. Meanwhile, shares of luxury homebuilder Toll Brothers, Inc. (TOL) are off 22% this year, while KB Home (KBH) stock is 24% lower.

According to Seeking Alpha, owing to the rising mortgage rates and a declining desire for new construction among homebuyers, revenue growth at some of the homebuilders has declined to the single-digit range. As a result, investors have gotten out of their positions. After all, double-digit revenue growth is going to be rewarded much differently than single-digit gains in revenue.