By Arunima Banerjee and Ankit Ajmera
(Reuters) - Shares of U.S. homebuilders dropped on Wednesday after data showed mortgage applications decreased in the latest week, at a time when concerns of a slowdown in the housing industry is already worrying investors.
Shares of D.R. Horton Inc (N:DHI), Lennar Corp (N:LEN), PulteGroup Inc (N:PHM), Toll Brothers Inc (N:TOL) fell about 4 percent while those of KB Home (N:KBH) and Meritage Homes Corp (N:MTH) fell about 5 percent, ahead of a Federal Reserve statement widely expected to raise interest rates.
The Fed has raised rates three times last year and once this year.
U.S. mortgage applications decreased 1.5 percent in the week ended June 8 as 30-year home borrowing costs rose to near seven-year peaks prompted by a selloff in the U.S. bond market, the Mortgage Bankers Association said.
A shortage in supply of homes has already been steadily lifting home prices, in turn dampening affordability, especially for the first time buyers who form a significant chunk of the housing market.
"Home affordability in a lot of U.S. markets is already at levels where there is some concern (among investors). When you add in higher interest rates that can add to that," Morningstar analyst Brian Bernard said.
An increase in lumber costs as well as that of land and labor is also a concern - spurring a prolonged squeeze on profit margins that is forcing builders to increase home prices.
"New home orders are not breaking new highs, which may lead to lower revenue growth for homebuilders in second half of 2018 and 2019," CFRA analyst Ken Leon wrote in note published last week, adding that the spring selling season was off to a weak start.
However, analysts remain bullish on demand for new homes as mortgage rates hover around historical lows and job market improves.