Stocks hover at record highs as Dow reaches 40,000

Housing stocks took a hit on Wednesday morning as new government data revealed a sluggish recovery in residential construction, sending major homebuilders like D.R. Horton, Lennar, and Toll Brothers tumbling during morning trading.

The SPDR S&P Homebuilders ETF (XHB) was down 1% as construction for single-family and multifamily homes showed a modest rebound in April but remained lower than expected, with year-over-year figures also down. Rising mortgage rates were cited as a key factor dampening housing activity.

According to data from the Census Bureau, privately-owned housing starts in April reached a seasonally adjusted annual rate of 1.36 million, up 5.7% from March but down 0.6% from the previous year. Economists had anticipated a higher rate of 1.42 million, leading to concerns about the strength of the recovery.

Thomas Ryan, an economist at Capital Economics, expressed doubt about the above-consensus forecast for homebuilding following the release of the data. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index also fell in May, indicating a lack of confidence among builders as mortgage rates remained high.

Despite the challenges, Ryan remains optimistic about single-family starts potentially reaching 1.11 million this year, driven by demand for newbuilds amid a shortage of second-hand homes on the market. However, weaker movement in multifamily starts could offset some of that strength, leaving total housing starts at 1.43 million by the end of the year.