Rising Rates Put U.S. Homebuilders -- and Investors -- in a Spot

(Bloomberg) -- The Fed’s rate hike Wednesday, and its signal of two more increases to come this year, will only add to investors’ biggest worry about the U.S. housing market -- that it’s getting too expensive.

An S&P index of U.S. homebuilders was down 4.6 percent at 3:39 p.m. in New York, its largest loss in almost a month. While wages are beginning to rise, home prices have been surging for years as buyers compete for a shrinking inventory of listings.

“At some point the combined cost of higher home prices and higher rates will begin to limit what home shoppers can afford to spend,” Zillow Senior Economist Aaron Terrazas said in a statement about the Fed’s decision.

“Deteriorating affordability may lead some buyers to lower their overall buying budget, increasing demand -- and prices -- for the types of less-expensive homes that are already highly sought after,” Terrazas wrote.

Concern over interest rates and a potential housing downturn is spreading, a survey by Zelman & Associates finds.

The market still has plenty going for it, with a crowd of millennials entering prime homebuying age.

“People are worried about affordability in general, with rising prices, and now
you add in higher mortgage rates,” Morningstar Inc. analyst Brian Bernard said
in a phone interview. “But as long as we have a good economy, I think it’s OK.”

Bernard said homebuilders such as DR Horton Inc. are offering houses with millennial-friendly prices that will help keep business strong even if rates continue to rise at a moderate pace.

To contact the reporter on this story: Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Peter Jeffrey, Christine Maurus

©2018 Bloomberg L.P.