Homebuilders Get Roughed Up

The sector is weaker after a strong jobs report.
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Updated from 3:35 p.m. EDT

Homebuilders' shares were rattled Friday after a strong employment report for July suggested interest rates may be going still higher.

The Dow Jones U.S. Home Construction index was lower by 5.5%, reflecting the pressure on individual names in the sector.

The labor market had a solid showing in July, with 207,000 jobs created and the unemployment rate holding at 5%. Payrolls were revised higher for May and June, lending support to the bulls who see steady growth and additional

Federal Reserve

rate hikes from the current 3.25% benchmark.

Average hourly earnings rose by 0.4%, the largest increase in a year, the Labor Department said.

Meanwhile,

Hovnanian Enterprises

(HOV) - Get Report

said contract growth in two U.S. regions the company serves slowed in the the third quarter.

Hovnanian said the number of net contracts in the Northeast declined, while the dollar value of contracts rose in the quarter. The company attributed the results to "a moderate shift in the mix of communities in the Northeast over the past 12 months to higher priced but lower volume communities."

As for the western region, both the number and dollar value of net contracts dropped in the third quarter, in part because of development setbacks and building-permit delays in some communities.

Therefore, Hovnanian said it plans to limit the release of additional phases of new homes for sale in the affected communities. Otherwise, the company's update appeared to show sound growth.

Shares of Hovnanian were down nearly 7% to $64.91.

Toll Brothers

(TOL) - Get Report

dropped 8% to $50.59, and

Lennar

(LEN) - Get Report

lost 5% to $62.40.

Pulte

(PHM) - Get Report

shed 5%, and

KB Home

(KBH) - Get Report

was giving up 6%.

Hovnanian said that for the third quarter, the dollar value of net contracts, including joint ventures, increased 34.8% to $1.7 billion, and the number of net contracts rose 16.6%. The sales value of the company's contract backlog at July 31 was up 55.7% from a year ago to $4.2 billion.

For July, the dollar value of net contracts rose 39.9%, while the number of contracts climbed 20.2% from the same month in 2004. Hovnanian delivered 3,967 homes in the third quarter, compared with 3,738 deliveries last year.

Another homebuilder,

Dominion Homes

(DHOM)

, was falling more than 9% after the company posted second-quarter revenue of $105.2 million, down from $148.2 million last year. Net income dropped to $2.5 million, or 31 cents a share, from $6.6 million, or 81 cents a share, last year.

Dominion delivered 548 homes for the quarter ended June 30, compared with 778 deliveries the prior year.

Treasury yields rose after the jobs report. The 10-year was down 19/32 in price to yield 4.39%, and the 30-year bond slid 30/32, yielding 4.58%. The yield on the two-year was up to 4.10%.

According to

Bloomberg

, every economist it surveyed expects the Fed to raise the federal funds rate by another quarter-point at its meeting next week.