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Mortgage Applications Drop as Rates Hit 6%: Housing in Fear?

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The U.S. housing industry has been in the drift of various economic headwinds this year. Things have worsened as Fed announced its intention to fight inflation with interest rate hikes. Per the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey, for the week ending Sep 9, activity declined 1.2% from the previous week. Notably, this marks the lowest level since December 1999.

The Refinance Index also fell 4% for the previous week and was 83% lower than the year-ago period’s levels.

Mortgage Rates Doubled in a Year

The recent Freddie Mac’s Primary Mortgage Market Survey shows that the 30-year fixed mortgage rate has gone up to 6.02% for the week ending Sep 15. This marks the highest reading since 2008 and essentially double the year-ago figure. In the year-ago period, applications stood at approximately 708 when mortgage rates were near 3%.

Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, stated, “Higher mortgage rates have pushed refinance activity down more than 80 percent from last year and have contributed to more homebuyers staying on the sidelines. Government loans, which tend to be favored by first-time buyers, bucked this trend and increased over the week, driven mainly by VA and USDA lending activity.”

Next week, Fed will likely announce another hike in interest rates to combat persistent inflation, which has remained at more than 8% year-over-year rate for the sixth straight month. The Bureau of Labor Statistics (BLS) reported a 0.1% increase in the Consumer Price Index (CPI) in August from July and 8.3% from August 2021 (on a seasonally adjusted basis). After adjusting for energy sources, which fell 5%, core CPI rose 0.6% month over month and 6.3% year over year.

The index for shelter (accounting for more than 40% of the core CPI) increased 0.7% in August due to the lack of supply and higher development costs. The prices of building materials rose 0.5% in the same month despite a 5.2% decline in softwood lumber prices, according to BLS’s recent Producer Price Index (PPI). Building materials prices jumped 14.3% from the year-ago period’s levels.

The above-mentioned factors point to a significant affordability issue expected to last for near term as well. Finest homebuilders like D.R. Horton, Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , PulteGroup, Inc. (PHM - Free Report) , NVR, Inc. (NVR - Free Report) , Meritage Homes Corporation (MTH - Free Report) , KB Home (KBH - Free Report) and M.D.C. Holdings, Inc. (MDC - Free Report) are grappling with these persistent issues. In the last reported quarter, most of these bigwigs reported low volume/deliveries and near flat/down orders.

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Shares of the Zacks Building Products - Home Builders industry, the Zacks Construction sector and S&P 500 declined 36.9%, 27.5% and 18.8% this year. Nonetheless, the industry has started improving recently. In the past three months, these indexes gained 10.4%, 6.8% and 5.9%, respectively.

A Brief Outlook of Above-Mentioned Stocks

D.R. Horton lowered its revenue guidance for the full year, given expected completion dates of homes under construction and current market conditions. During third-quarter fiscal 2022, it experienced late construction cycle. In June, it began to see a moderation in housing demand as mortgage interest rates increased substantially and inflationary pressures remained elevated. These pressures are likely to persist for some time.

DHI, carrying a Zacks Rank #3 (Hold), is expected to witness 19.5% YOY decline in fiscal 2023 earnings.

Lennar witnessed unprecedented supply-chain challenges in second-quarter fiscal 2022. Although its cycle time improved sequentially and quarterly starts and sales pace remained strong, it is likely to generate 17.5% lower earnings in fiscal 2023.

LEN, a Zacks Rank #4 (Sell), is about to post its quarterly numbers on Sep 21. This leading homebuilder is likely to gain in double digits in fiscal third quarter amid economic woes given the solid backlog level.

The Fed’s move to hike interest rates for combating inflation, along with lower consumer confidence have been moderating the demand environment for PulteGroup. The company stated, “the desire for homeownership is high and the long-term outlook for housing remains positive.”

PHM, which carries a Zacks Rank #3, is expected to witness 11.1% YOY decline in 2023 earnings.

NVR is likely to post earnings growth in double digits in third quarter amid economic woes.

NVR, a Zacks Rank #4, is expected to witness 15.8% YOY decline in 2023 earnings.

Meritage Homes refrained from providing a guidance for 2022 given the Fed’s hawkish stance. Rising rates, unprecedented supply-chain challenges, and rising land and labor costs, are risks.

MTH, with a Zacks Rank #3, is expected to witness 20.4% YOY decline in 2023 earnings.

KB Home, a Zacks Rank #4, is about to post its quarterly numbers on Sep 21. This leading homebuilder is likely to gain in double digits in fiscal third quarter amid economic woes given the solid backlog level.

For fiscal 2022, KBH expects housing revenues in the range of $7.30-$7.50 billion, narrower than the previous expectation of $7.20-$7.60 billion. Assuming no inventory-related charges, KB Home expects fiscal 2022 housing gross margin in the range of 25.6-26.2%, narrower than the prior expectation of 25.5-26.3%.

MDC experienced a year-over-year decline in net orders during the second quarter, driven by a slowdown in demand, an uptick in cancellations and difficult order comparisons from the prior year period. MDC expects these headwinds to persist for the remainder of the year.

MDC, carrying a Zacks Rank #3, is expected to witness 11.1% YOY decline in 2023 earnings.

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