Home Builders Get a Reality Check

Shares of Lennar and other home builders slipped Wednesday after bearish data from the Commerce Department.


Photo:

Daniel Acker/Bloomberg News

Shares of home builders have been on a tear this year. But fresh housing data could hold them back.

Home building in the U.S. declined in June, potentially putting a halt to an epic rally for shares of companies that tend to benefit from the manufacturing activity. Big, publicly traded home builders such as

LGI Homes
,


LGIH -3.63%

Inc.,

Lennar
Corp.


LEN.B -1.81%

,

D.R. Horton
,


DHI -0.53%

Inc. and

PulteGroup

Inc. have soared this year, outpacing the S&P 500’s roughly 19% gain. LGI shares have risen 59%, while Lennar’s have gained 20%. D.R. Horton has advanced more than 30%.

But several home builders inched lower on Wednesday after fresh data from the Commerce Department showed that housing starts, a measure of new-home construction, fell 0.9% in June from the prior month. Meanwhile, residential building permits recorded the biggest monthly drop since March 2016. These permits can indicate how much construction is in the pipeline.

LGI fell 3.6%, while Lennar dropped 2%, both recording steeper declines than the broader market. Toll Brothers Inc. lost 1.5%. Their forward price/earnings ratios also have fallen since early 2018, a sign investors’ outlooks on the shares have moderated.

Shares of companies that enable consumers to make improvements to their homes also fell.

Lowe’s Companies
,

Inc. lost 1.5%.

Sherwin-Williams
Co.

dropped 2.3%.

Lower borrowing costs could help the housing market; rates for 30-year fixed mortgages recently fell below 4% and spurred a surge in mortgage applications.

But a continuation of sagging housing data could put an end to the home-builder rally, potentially weighing on other sectors such as companies that specialize in manufacturing wood products. These types of companies, which include

Canfor
Corp.

,

Interfor
Corp.

and

West Fraser Timber
Co.

Ltd., already have fallen at least 15% each this year.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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