In 2023, the United States housing market experienced a significant downturn, driven by the Federal Reserve’s hawkish monetary policy. This tightening of financial conditions led to a remarkably inaccessible market, especially for first-time buyers. Hence, the dream of homeownership has been overshadowed by rising housing costs, limited inventory, and competitive bidding processes. The outlook for 2024 isn’t promising either. Predictions indicate that existing home sales will remain depressed, prompting investors to discard doomed homebuilder stocks.
This stagnation in the housing market has had spillover effects. These effects imapcted multiple related sectors. Hardware stores, furniture sellers, and particularly homebuilders are feeling the pinch as the flow of new homeowners, a key driver of demand, slows down at a substantial pace.
KB Home (KBH)
KB Home (NYSE:KBH), once riding high on the 2021 market euphoria, is now navigating rougher seas. The recent fiscal winds haven’t been too kind to KB Home, with its top-line growth taking a definitive turn into negative territory. Moreover, as the market tightens, the company braces for a slight dip in its homebuilding operating profit margins in 2024, forecasting 11% compared to 11.3% in the previous year, hinting at a more frugal horizon.
In its fourth quarter, KB Home’s revenue dropped 13.7% year-over-year, continuing its negative run from the last quarter. Moreover, its average selling price, while up sequentially, stumbled when pitted against last year’s numbers. Moreover, while net orders picked up from a year ago, the sequential tumble is tough to ignore. TipRank’s analysts have held their cards close, with a hold consensus on KBH stock. Hence, it’s a clear signal to its investors that the road ahead is unpaved and uncertain.
Proptech player, Redfin (NASDAQ:RDFN) stands at a crossroads, with its fortunes tethered to the housing market’s unpredictable swings. On the surface, Redfin’s integration of mortgage sales, online real estate brokerage, and many other real estate services position it to potentially capitalize on a market upturn.
Yet, this rosy outlook is clouded by the company’s reliance on an employee agent model, a costly strategy favoring nimbleness. The hopeful breeze of dipping mortgage rates does little to dispel the clouds over the firm’s rigid cost framework, which could buckle in a downturn. Moreover, while Redfin’s digital and mortgage ventures have potential, they paint but a sliver of a more troubling canvas.
These challenges are reflected in its deplorable bottom-line performance, marked by a negative 7.8% income margin and a negative 360% return on common equity on a year-over-year basis. With an F-graded profitability profile, expect Redfin to continue burning its shareholders for the foreseeable future.
Invesco Dynamic Building & Construction ETF (PKB)
Invesco Dynamic Building & Construction ETF (NYSEARCA:PKB) may appear as a secure gateway to the construction sphere with its portfolio of 30 stocks mirroring the Dynamic Building & Construction Intellidex Index, but this perception is flawed. Laden with inefficiencies, the stock pressures investors with an expense ratio of 0.62%, significantly higher than the median of 0.49%, eroding potential returns. Its trading mechanics are equally troubling, with a bid/ask spread of 0.17% highlighting its costliness and liquidity issues.
Venture into PKB’s performance, and you’ll encounter a standard deviation that soars to 30.04, more than double the ETF median. Additionally, the ETF’s annualized volatility is no less distressing at 22.92%, portending a tumultuous investment journey. And while it might boast lower short interest, a substantial 45.59% of its assets are precariously piled into the top 10 holdings, signaling a dangerous concentration risk. Avoid this and the other doomed homebuilder stocks.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines