Beware of These 4 Homebuilding Stocks as Mortgage Rates Hit 20 Month Highs

NYSE: DHI | D.R. Horton, Inc.  News, Ratings, and Charts

DHI – Rising inflation and expected interest rate hikes have pushed mortgage rates to a 20-month high lately. And since higher mortgage rates could cause a decline in demand for homes, the homebuilding industry might witness a downtrend in the near term. Therefore, we think it could be wise to avoid home building stocks D.R. Horton (DHI), Meritage Homes (MTH), M.D.C. (MDC), and KB Home (KBH). Let’s discuss.

The 30-year fixed-rate mortgage jumped from 3.1% to 3.2% last week. The rate is more than a half-point higher than the 2.65% from a year ago. The current increase in rates will cost potential homebuyers significantly by increasing their monthly payments. Therefore, the housing market could cool down in the near term, impacting homebuilders.

Furthermore, an expected tightening of monetary policy by the central bank and persistent supply chain constraints could continue to dampen the homebuilding industry’s near-term prospects.

Therefore, we think it could be wise to avoid homebuilding stocks D.R. Horton, Inc. (DHI), Meritage Homes Corporation (MTH), M.D.C. Holdings, Inc. (MDC), and KB Home (KBH).

D.R. Horton, Inc. (DHI)

DHI in Fort Worth, Tex., is a home building company that operates in 31 states and 98 markets. The company’s 55 homebuilding divisions are arranged into six segments–East Region; South Central Region; Midwest Region; West Region; Southwest Region, and Southeast Region. DHI also provides mortgage financing services, title insurance policies, examination, and closing services, and engages in the residential lot development business.

DHI’s revenues increased 26.7% year-over-year to $8.11 billion in its fiscal fourth quarter, ended Sept. 30, 2021. However, the company’s other expenses grew 92.9% from its year-ago value to $13.5 million. DHI’s shares have declined  12.7% over the past month.

DHI’s POWR Ratings are consistent with this bleak outlook. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

Also, the stock has a C grade for Value, Growth, and Quality. We have also graded DHI for Sentiment, Momentum, and Stability. Click here to access all DHI’s ratings. DHI is ranked #15 of  23 stocks in the A-rated Homebuilders industry.

Meritage Homes Corporation (MTH)

MTH is a designer and builder of single-family homes that operates through the Homebuilding and Financial Services segments. The Scottsdale, Ariz., company’s segments acquire and develop land, construct houses, and build and sell those homes in Texas, Arizona, California, Colorado, Florida, North Carolina, South Carolina, Georgia, and Tennessee under the Meritage Homes brand name. Also, it provides title and escrow, mortgage, and insurance services and operates Carefree Title Agency, Inc. company.

During the third quarter, ended Sept. 30, 2021, MTH’s total closing revenue increased 10.7% year-over-year to $1.26 billion. However, the company’s financial expenses grew 13.9% from their year-ago value to $2.31 million. Its interest expenses rose 43.6% from the prior-year quarter to $79,000. Also, the company’s cash and cash equivalents decreased 24.6% to $562.29 million for the nine months ended September 30, 2021. MTH’s shares have  declined 11.2% in price over the past month.

MTH’s poor prospects are apparent in its POWR Ratings. Also, the stock has a C grade for Sentiment, Stability, and Quality.

In addition to the POWR Rating grades I have just highlighted, one can see MTH’s ratings for Growth, Value, and Momentum here. MTH is ranked #12 in the Homebuilders industry.

M.D.C. Holdings, Inc. (MDC)

MDC, through its subsidiaries, engages in the homebuilding and financial service businesses. The Denver, Colo.-based company’s homebuilding operations consist of subsidiary companies that purchase finished lots or develop lots necessary for the construction and sale of homes under Richmond American Homes. MDC conducts its homebuilding operations in Arizona, California, Nevada, Washington, Oregon, Colorado, Utah, Virginia, Maryland, and Florida. 

For the third quarter, ended Sept.30, 2021, MDC’s home sale revenues increased 25.7% year-over-year to $1.26 billion. However, the company’s other expenses grew 59.1% from their year-ago value to $1.35 million. Its financial expenses rose 23.2% from the prior-year quarter to $16.38 million. MDC stock has declined 14.9% in price over the past nine months and 6.3% over the past month.

MDC has a D grade for Quality and a C grade for Value and Stability in our POWR Ratings System. Click here to see the additional POWR Ratings for MDC (Momentum, Growth, and Sentiment). MDC is ranked #18 in the Homebuilders  industry.

KB Home (KBH)

Los Angeles-based KBH is a home building company that operates through four segments: West Coast; Southwest; Central; and Southeast. The company builds a variety of new homes that are designed primarily for first move-up, second move-up, and active adult homebuyers and includes attached and detached single-family residential homes, townhomes, and condominiums. KBH also offers financial services, such as insurance products and title services. 

During the third quarter, ended Aug. 31, 2021, KBH’s total revenues increased 46.9% year-over-year to $1.47 billion. However, the company’s interest income decreased 81.7% from its year-ago value to $144,000. Its expenses rose 16.9% from the prior-year quarter to $1.23 million. KBH’s stock has declined 16.3% in price over the past nine months and 7.9% over the past month.

KBH’s POWR Ratings reflect its poor prospects. KBH has a D grade for Sentiment and Quality and a C grade for Stability. In the Homebuilders industry, it is ranked #20. Click here to see the additional POWR Ratings for KBH (Growth, Value, and Momentum).


DHI shares were trading at $97.89 per share on Tuesday afternoon, up $2.17 (+2.27%). Year-to-date, DHI has declined -9.74%, versus a -1.73% rise in the benchmark S&P 500 index during the same period.


About the Author: Priyanka Mandal


Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research. More...


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