Key Highlights

● Lennar touched 52-week lows as the 10-year Treasury Yield hit its highest close since 2002.

● The slide followed an Oct. 2 Hunterbrook short-seller report alleging Lennar sold homes to Spinoff Millrose Properties to hit quarterly targets.

● Morgan Stanley started coverage of Lennar at Underweight with a $65 price target the same week.

Lennar shares sank to 52-week lows on Monday as Treasury yields climbed to multi-decade highs, one session after a short seller published a report about the homebuilder.

Homebuilder hits a fresh low

Lennar (NYSE:LEN) sank on Monday, Oct. 5, touching 52-week lows and closing among the weakest stocks in the S&P 500. No new company announcement was found to explain Monday's move.

The most obvious pressure came from the bond market. The 10-year Treasury yield climbed to its highest close since 2002, and long-term yields across the curve hit 52-week highs. For homebuilders, that matters directly: Mortgage rates track long-term Treasury yields, and they remain at their highest levels in years. Higher borrowing costs can squeeze how much home buyers can afford.

Lennar was not alone. Home-improvement retailer Lowe's (NYSE:LOW) and McDonald's (NYSE:MCD) also touched 52-week lows before bouncing, as rate-sensitive stocks came under pressure.

The short-seller report in the background

The slide also came one Trading session after a report published Oct. 2 by short seller Hunterbrook. In that report, Hunterbrook alleged that Lennar sold about 700 homes, worth about $200 million, to its spinoff Millrose Properties (NYSE:MRP) to hit quarterly targets.

Those allegations have not been proven, and Lennar has not been found to have done anything wrong. No new company announcement on the matter was found on Oct. 5. Short sellers profit when a stock falls, and their reports reflect their own views.

Also on Oct. 2, Morgan Stanley started coverage of Lennar with an Underweight rating and a $65 price target.

Millrose Properties also fell on Monday after Citizens downgraded the stock to Market Perform from Market Outperform.

Separately, Berkshire Hathaway (NYSE:BRK.B) said it is now America's fourth-largest homebuilder and owns a large stake in Lennar.

A two-speed market

The weakness in housing stocks stood in sharp contrast to the rest of the market. The S&P 500 rose 51.23 points to 7,773.95, just shy of its summer record. The Nasdaq Composite climbed 286.45 points to a record close of 27,477.31, and the Dow Jones Industrial Average added 90.94 points to 51,267.90.

Big technology stocks carried those gains. Inside the S&P 500, advancers outnumbered decliners by 1.7-to-1, which made Lennar's slide stand out even more. Rate-sensitive groups did not share in the rally. Real estate and consumer staples have each fallen for eight straight weeks, and real estate was among the decliners again on Monday.

Why are yields rising when the jobs data is weak? Friday's report showed only 29,000 jobs added in September, which cut bets on an October Federal Reserve rate hike. But Inflation worries remain. The ISM services prices-paid index rose to its highest level since July 2022, and oil prices remain elevated even after Brent slipped to settle at $100.32 a barrel. Heavy federal borrowing has added to the pressure on long-term rates.

"The prices index continues to trend markedly higher," said Matthew Martin, senior US economist at Oxford Economics, adding that "price pressures are building."

What to watch

The next signal for rates arrives on Wednesday, Oct. 7, when the Federal Reserve releases minutes of its September meeting at 2pm ET. The Fed's next policy meeting is Oct. 27-28. For Lennar, investors will watch for any company response to the Hunterbrook report, the path of mortgage rates, and the homebuilder's next quarterly report. Any further moves in the 10-year yield are likely to keep housing stocks in focus.