Major home-building stocks skidded Friday after a Wall Street analyst downgraded several key companies and investors sold shares on concern that a strengthening economy could lead to higher interest rates and slow the booming housing market.
Among the biggest losers were Ryland Group Inc. of Calabasas and Lennar Corp. of Miami, which have significant activity in California. Shares of Ryland fell $6.43, or 6.9%, to $86.50, and Lennar shed $4, or 4.2%, to $90.99, both on the New York Stock Exchange.
Ivy Zelman, an analyst at Credit Suisse First Boston, lowered her ratings Friday on Ryland, Lennar and two others to "neutral" from "outperform." She said the stocks were too expensive, noting that they approached or exceeded her firm's 12-month price targets.
KB Home of Los Angeles, another top builder in California, was not downgraded by CSFB, but its shares lost ground as well, dropping $3.35, or 4.7%, to $68 on the NYSE.
Analysts did not view the declines as troubling for the industry, which has enjoyed a banner year on Wall Street. The Standard & Poor's home-building index, which tracks 13 stocks, has jumped 96% this year.
Even after Friday's loss, Ryland's stock was up 159% for the year, and KB's was up 59%.
"Today was a good excuse for some investors to take some profits in the short run after a big run-up in prices," said industry analyst John Kasprzak of investment bank BB&T; Capital Markets in Richmond, Va. "The long-term outlook is still very positive."
Indeed, the National Assn. of Realtors' outlook for housing next year, which it released Friday, predicted that the market would slow slightly but still remain strong at historical levels.
This year is on track to be the best ever, the trade group said, with home resales projected to reach almost 6 million, up 7.7% from those in 2002. It expects housing starts to rise 4.6% to 1.78 million units, the highest level since 1986.
"Combined with the impact of immigrants and generally strong household creation expected for many years to come, the underlying demand for housing is not about to evaporate," said David Lereah, chief economist for the Realtors association. He predicted that next year would be the second-best ever for housing.
The national median existing-home price is forecast to rise 4.3% next year, about half this year's expected growth rate.
Still, Federal Reserve Chairman Alan Greenspan's remarks Thursday about accelerating economic growth, coupled with Friday's strong employment report for October, apparently weighed on some investors who see the era of exceedingly low interest rates drawing to a close.
Analysts generally agree that interest rates are likely to rise in the next year but not dramatically enough to upset housing demand and affordability.
"I think the stock declines Friday sound like a tempest in a teapot," said G.U. Krueger, a housing economist at IHP Capital Partners, an Irvine investment firm.
The Realtors association, in its forecast, projected that 30-year fixed-rate mortgages would rise gradually from an average of 5.9% this year to 6.5% in 2004.