2 Homebuilding Stocks to Avoid as Interest Rates Rise

NYSE: TOL | Toll Brothers, Inc.  News, Ratings, and Charts

TOL – Rising mortgage rates have slowed refinancing and new loan originations, putting the brakes on the housing industry’s growth. Furthermore, persistent supply chain constraints and tightening labor markets continue to impair the industry’s prospects. Given this backdrop, we believe homebuilding stocks Toll Brothers (TOL) and KB Home (KBH) are best avoided now. Read on.

The 30-year fixed-rate mortgage’s average contract interest rate has climbed to 3.72% from 3.64%, prompting fears among homebuyers that they will no longer be able to afford the properties they want. According to the Mortgage Bankers Association’s seasonally adjusted index, mortgage refinancing applications, which are particularly sensitive to daily rate swings, have declined 13% for the week and are 53% lower year over year.

In addition, considering the Fed’s decision to hike interest rates in March to tame inflation, persistent supply chain crisis, and a tightening labor market, the home building industry’s growth prospects could be negatively affected.

Therefore, we think investors are better off avoiding homebuilding stocks Toll Brothers Inc. (TOL) and KB Home (KBH). These stocks have suffered significant price declines over the past few months and could continue to retreat further based on their bleak growth outlook.

Toll Brothers Inc. (TOL)

TOL and its subsidiaries design, build, market, sell, and arrange to finance a variety of detached and attached houses in luxury residential communities around the United States. Traditional Home Building and City Living are the company’s two operational segments. In addition, it has a strategic partnership with Equity Residential to develop new rental apartment communities in the U.S. markets. TOL is headquartered in Horsham, Pa.

TOL’s selling, general, and administrative expenses increased 4.8% year-over-year to $258.19 million in the fourth quarter, ended Oct. 31, 2021. Its 22.4% trailing-12-months gross profit margin is 37.6% lower than the 35.9% industry average. Also, its CAPEX/Sales multiple and asset turnover ratio are 69.6% and 25.7% lower than their respective 2.5% and 1.1% industry averages.

The stock has declined 7.1% in price over the past three months and 20.3% over the past month.

KB Home (KBH)

KB Home is a Los Angeles-based home building company. It primarily caters to first-time, first-move-up, second-move-up, and active adult homebuyers by building and selling connected and detached single-family residential houses, townhomes, and condos. The company operates in four segments: West Coast, Southwest, Central, and Southeast. In addition, it provides financial services, such as insurance and title services.

For the fourth quarter, ended Nov. 31, 2021, KBH’s cost and expenses increased 35.4% year-over-year to $1.45 billion. Its interest income declined 97.2% from its year-ago value to $11,000. The company’s cash and cash equivalents decreased 57.3% from the prior year to $290.76 million.

KBH’s 22.5% trailing-12-months gross profit margin is 37.4% lower than the 35.9% industry average. Also, its CAPEX/Sales multiple and asset turnover ratio are 75% and 2.3% lower than their 2.5% and 1.1% respective industry averages. Furthermore, its trailing-12-month cash from operations stood at a negative $198.76 million compared to the $183.70 million industry average.

The stock has declined 17.4% in price over the past nine months and 7.4% over the past month.


TOL shares were trading at $55.62 per share on Thursday morning, down $0.55 (-0.98%). Year-to-date, TOL has declined -22.98%, versus a -7.22% rise in the benchmark S&P 500 index during the same period.


About the Author: Pragya Pandey


Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
TOLGet RatingGet RatingGet Rating
KBHGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


:  |  News, Ratings, and Charts

Bear Market Game Plan Revealed!

The bear market has been firmly in place all year long. Just some folks didn’t get the memo til 6/13 when the S&P 500 (SPY) finally broke below the 20% decline level at 3,855 to appreciate just how bad things had become. That is the past. We need to focus on the future like how low the stocks will go...and the best trades to stay on the right side of the market action. All that and more is in Steve Reitmeister “Bear Market Game Plan”. Read on below for more...

:  |  News, Ratings, and Charts

Insiders Are Making Big Buys In Carvana – Should You?

Used car retailer Carvana (CVNA) has seen significant insider buying recently, reflecting bullish sentiments. However, given its bleak bottom-line positioning, should you invest in the stock now? Read on to find out...

:  |  News, Ratings, and Charts

Investors: Please AVOID Cash During This Bear Market

When most people hear the sirens of the bear market they run for cover in cash. But is that the smartest idea when inflation is over 8% and your cash accounts still pay virtually nothing? (That was a rhetorical question). Gladly there is a better way to carve out profits as the stock market (SPY) heads lower and lower. 40 year investment veteran Steve Reitmeister shares that with you and more in his newest commentary below…

:  |  News, Ratings, and Charts

3 Top-Rated High-Dividend Stocks Under $20

The Fed’s aggressive interest rate hikes in the face of the rising inflation are raising the possibility of the economy tipping into a recession. Given the market uncertainties, high-dividend stocks Sisecam Resources (SIRE), Grindrod Shipping (GRIN), and Alliance Resource (ARLP), which are currently trading under $20, could be an ideal investment to ensure a stable income stream. These stocks are rated Strong Buy or Buy in our proprietary rating system. Keep reading…

:  |  News, Ratings, and Charts

Investors: Please AVOID Cash During This Bear Market

When most people hear the sirens of the bear market they run for cover in cash. But is that the smartest idea when inflation is over 8% and your cash accounts still pay virtually nothing? (That was a rhetorical question). Gladly there is a better way to carve out profits as the stock market (SPY) heads lower and lower. 40 year investment veteran Steve Reitmeister shares that with you and more in his newest commentary below…

Read More Stories

More Toll Brothers, Inc. (TOL) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All TOL News