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Wall Street pummels real estate stocks

May 19, 2004

Rising interest rates contribute to lower valuations

By Samantha Peterson
Inman News

Stock prices of publicly owned companies throughout the housing sector have tumbled in recent weeks as mortgage interest rates have risen in anticipation of the Federal Reserve raising its key funds rate.

Some interest rate-sensitive stocks have dipped as much as 26 percent since March 31, the last time the Mortgage Bankers Association's weekly survey reported an average interest rate lower than 5.5 percent on the benchmark 30-year fixed-rate mortgage. Not all stock prices have lost a fourth of their value, but many have suffered losses of about 15 percent.

The average rate for that benchmark mortgage has climbed steadily since the end of March to as high as 6.32 percent this month, according to MBA survey's last week.

The stock price declines haven't been due solely to interest rate climbs. Wall Street also has reacted to housing companies' recent first quarter earnings reports. Several companies' public statements mentioned a drop off in mortgage refinancings and the specter of rising interest rates.

Home builders' stocks have been especially hard hit. Standard& Poor's Supercomposite Homebuilding Index hit a six-month low earlier this month. Shares of D.R. Horton, KB Homes, Lennar Corp., Pulte Homes, Toll Brothers and Centex Corp. have all dropped at least 14 percent since the end of March. D.R. Horton and KB Homes suffered declines of 24 percent and 22 percent, respectively.

Some lenders' stocks have fared better than those of home builders. Bank of America suffered a loss of less than 2 percent since the end of March, while Wells Fargo's stock has been virtually unchanged.

Washington Mutual's stock, however, has slid about 9 percent. J.P. Morgan Chase has dropped almost 16 percent, and IndyMac Bank has declined 17 percent. IndyMac reported a year-over-year gain in its first quarter earnings, but pointed out that interest rates had increased significantly in recent weeks.

Very large companies with significant real estate interests have been affected as well. Cendant Corp.'s shares have lost about 9 percent while Prudential Financial's stock has dropped about 6 percent.

Title companies haven't been so lucky.

LandAmerica's stock has dropped 18 percent since March 31. The company in a statement said earnings for the first quarter of this year had dropped almost 50 percent compared with the first quarter of 2003. The company said the drop was due to reduced refinancing volume during the first part of the quarter and other factors.

Fidelity National Financial's stock has dropped 14 percent during the same time frame, First American's stock has dropped 19 percent, and Stewart Information Services has suffered a loss of about 17 percent.

Stewart's net earnings during the first quarter of 2004 were down as well compared with its year-ago results. Title orders were down primarily because of a decline in refinancings, which the company attributed to the rise in interest rates.

Real estate technology companies haven't been spared either. E-Loan's stock has dropped nearly 25 percent since March 31. InterActive Corp., which owns LendingTree and RealEstate.com, has declined 9 percent.

Shares of Homestore, which operates the Realtor.com Web site for the National Association of Realtors, declined less than 1 percent since March 31, when trading closed at $4.23. The stock price hit $5.81 in mid-April, then closed Monday at $4.21.

Radian Group is one of only a few housing sector companies that have bucked the downward trend in share prices. Radian's stock has increased 4 percent since the end of March.

The Federal Reserve Open Market Committee at its May 4 meeting kept its target for the federal funds rate, the rate banks charge each other overnight, at 1 percent. But it also changed some wording in its statement, taking out a hint that it could be patient in raising rates. Instead, the Fed said rates would increase "at a pace that is likely to be measured."

A change in the Fed's target rate has no direct effect on other rates, but often has an indirect effect on other rates, such as mortgages. The anticipation of that target rate rising is already playing out on Wall Street, and that in turn affects housing sector companies that must ride the waves and crests of interest rate cycles.

Copyright: Inman News Features



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