Homebuilder shares plunge after JP Morgan says recovery will be ‘tepid’

Luke Sharrett | Bloomberg | Getty Images

A contractor moves lumber for a house under construction in the Norton Commons subdivision of Louisville, Kentucky.

Homebuilder stocks fell Friday after J.P. Morgan said it is “more cautious” about the sector’s prospects.

The firm lowered its ratings for five homebuilder stocks Friday – including reducing PulteGroup and M.D.C. Holdings to underweight and moving Beazer Homes, Century Communities and Meritage Homes shares to neutral from overweight.

“We are becoming more cautious on the homebuilding sector,” analyst Michael Rehaut said in a note to clients Friday. “We expect the housing recovery to remain fairly tepid in 2019.”

Shares of M.D.C., Beazer , Century Communities and Meritage all fell by more than 3 percent, while PulteGroup’s stock dropped about 2 percent Friday after the report.

The analyst said rising inventories of new homes and declining affordability will hurt home prices over the next year. He cited J.P. Morgan’s growth estimates of 150,000 jobs per month on average for 2019 vs. the 207,000 monthly job growth average so far this year.

“We expect builder fundamentals to moderate over the next two years, which include a continued softer order growth rate in 2H18 and gross margins peaking over the next 12 months,” he said.

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