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The homebuilding industry faces turbulent times as stubbornly high mortgage rates continue to plague builder confidence. With mortgage rates soaring to a 23-year high, the industry is experiencing its lowest levels of sentiment since January 2023. According to the National Association of Home Builders (“NAHB”) report released on Oct 17, the Monthly Housing Market Index (HMI) reading paints a bleak picture for the market.
Key Takeaways
Builder confidence in newly built single-family homes fell by four points to 40 in October, marking the third consecutive monthly drop in sentiment. All three major HMI indices declined, with the index for current sales conditions dropping four points to 46, the sales expectations in the next six months plummeting five points to 44, and the gauge for traffic of prospective buyers dipping four points to 26.
Interest Rate Factors, Affordability Takes a Hit
One major factor contributing to this decline is the surge in mortgage rates, which have remained above 7% for the past two months. Higher rates are deterring potential buyers, particularly younger ones, who are finding themselves priced out of the market. Additionally, the increased cost and availability of builder development and construction loans are hurting the supply, further damaging housing affordability.
According to Freddie Mac, the average 30-year fixed-rate mortgage was 7.57% for the week ending Oct 12, 2023. This was an eight-point increase from the previous week. The last time rates were this high was in December 2000. This surge was driven by the Federal Reserve's higher-for-longer monetary policy stance, strong third-quarter economic growth, and concerns over government budget deficits.
The housing affordability crisis remains a significant challenge. NAHB chief economist Robert Dietz highlighted that the solution lies in adding attainable, affordable supply. Increasing housing production is vital in tackling shelter inflation, which was responsible for over half of the Consumer Price Index's rise in September. Additionally, this would align with the Federal Reserve's mission to bring inflation back down to 2%. However, monetary policy uncertainty is adding to the affordability issues in the market.
Builders' Response
To combat the impact of high-interest rates, many builders are slashing home prices to stimulate sales. In October, 32% of builders reported cutting home prices, a rate unchanged from the previous month but the highest since December 2022. The average price discount remains at 6%. Furthermore, 62% of builders offered sales incentives of all forms in October, up from 59% in September, tying with the previous high set in December 2022.
Is Housing on Shaky Ground?
The decline in builder confidence in the face of soaring mortgage rates is a concerning trend for the homebuilding industry. Challenges stemming from higher rates, monetary policy uncertainty, and an affordability crisis are putting pressure on builders. The industry must navigate these obstacles to continue providing housing solutions for a growing population.
The hope for a rebound in sentiment largely depends on the trajectory of these rates and the Federal Reserve's monetary policy. Until then, the market is likely to see builders continuing to make price cuts and offering incentives to entice buyers.
In this challenging environment, potential homebuyers may discover chances to acquire a new residence at more budget-friendly rates. However, the industry's journey to resurgence critically relies on steering through the tumultuous waters of elevated mortgage rates and economic unpredictability. The housing market's future will continue to be intricately linked to the choices and initiatives of the Federal Reserve in the forthcoming months.
Among these, Lennar and KB Home currently carry a Zacks Rank #2 (Buy). Lennar has been benefiting from its digital marketing initiatives and a dynamic pricing model. Also, land-lighter strategy and effective cost-control measures. The Zacks Consensus Estimate for earnings per share (EPS) for fiscal 2023 has increased to $13.59 from $12.57 over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KB Home has been gaining from its Returns-Focused Growth Plan, which includes the execution of its core business strategy, improving asset efficiency and monetizing significant deferred tax assets. Its EPS estimate for fiscal 2023 has increased to $6.92 from $6.29 over the past 30 days.
Meanwhile, spec strategy implementation and focus on the growing demand for entry-level homes with its LiVE.NOW products have been benefiting Meritage Homes. However, this Zacks Rank #3 (Hold) company remains vulnerable to higher mortgage rates, supply-related constraints, and higher land, labor and material costs.
On the other hand, D.R. Horton and PulteGroup currently carry a Zacks Rank #4 (Sell). Above-mentioned headwinds have been impacting these homebuilders. D. R. Horton’s consensus mark for fiscal 2023 EPS has remained unchanged at $13.27 over the past 60 days, limiting the upside potential for the stock. Again, PulteGroup’s consensus mark for 2023 EPS has declined to $11.58 from $11.62 over the past seven days, depicting analysts’ concern over the company’s growth prospects.
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Builder Confidence Wanes Amid Rising Mortgage Rates
The homebuilding industry faces turbulent times as stubbornly high mortgage rates continue to plague builder confidence. With mortgage rates soaring to a 23-year high, the industry is experiencing its lowest levels of sentiment since January 2023. According to the National Association of Home Builders (“NAHB”) report released on Oct 17, the Monthly Housing Market Index (HMI) reading paints a bleak picture for the market.
Key Takeaways
Builder confidence in newly built single-family homes fell by four points to 40 in October, marking the third consecutive monthly drop in sentiment. All three major HMI indices declined, with the index for current sales conditions dropping four points to 46, the sales expectations in the next six months plummeting five points to 44, and the gauge for traffic of prospective buyers dipping four points to 26.
Interest Rate Factors, Affordability Takes a Hit
One major factor contributing to this decline is the surge in mortgage rates, which have remained above 7% for the past two months. Higher rates are deterring potential buyers, particularly younger ones, who are finding themselves priced out of the market. Additionally, the increased cost and availability of builder development and construction loans are hurting the supply, further damaging housing affordability.
According to Freddie Mac, the average 30-year fixed-rate mortgage was 7.57% for the week ending Oct 12, 2023. This was an eight-point increase from the previous week. The last time rates were this high was in December 2000. This surge was driven by the Federal Reserve's higher-for-longer monetary policy stance, strong third-quarter economic growth, and concerns over government budget deficits.
The housing affordability crisis remains a significant challenge. NAHB chief economist Robert Dietz highlighted that the solution lies in adding attainable, affordable supply. Increasing housing production is vital in tackling shelter inflation, which was responsible for over half of the Consumer Price Index's rise in September. Additionally, this would align with the Federal Reserve's mission to bring inflation back down to 2%. However, monetary policy uncertainty is adding to the affordability issues in the market.
Builders' Response
To combat the impact of high-interest rates, many builders are slashing home prices to stimulate sales. In October, 32% of builders reported cutting home prices, a rate unchanged from the previous month but the highest since December 2022. The average price discount remains at 6%. Furthermore, 62% of builders offered sales incentives of all forms in October, up from 59% in September, tying with the previous high set in December 2022.
Is Housing on Shaky Ground?
The decline in builder confidence in the face of soaring mortgage rates is a concerning trend for the homebuilding industry. Challenges stemming from higher rates, monetary policy uncertainty, and an affordability crisis are putting pressure on builders. The industry must navigate these obstacles to continue providing housing solutions for a growing population.
The hope for a rebound in sentiment largely depends on the trajectory of these rates and the Federal Reserve's monetary policy. Until then, the market is likely to see builders continuing to make price cuts and offering incentives to entice buyers.
In this challenging environment, potential homebuyers may discover chances to acquire a new residence at more budget-friendly rates. However, the industry's journey to resurgence critically relies on steering through the tumultuous waters of elevated mortgage rates and economic unpredictability. The housing market's future will continue to be intricately linked to the choices and initiatives of the Federal Reserve in the forthcoming months.
Image Source: Zacks Investment Research
Notably, homebuilders like Lennar Corporation (LEN - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , Meritage Homes Corporation (MTH - Free Report) , PulteGroup, Inc. (PHM - Free Report) and KB Home (KBH - Free Report) have declined 16.1%, 17.9%, 21.5%, 10.3% and 18.5%, respectively, over the past three months. The Zacks Building Products - Home Builders industry has declined 15.2% during the period.
Among these, Lennar and KB Home currently carry a Zacks Rank #2 (Buy). Lennar has been benefiting from its digital marketing initiatives and a dynamic pricing model. Also, land-lighter strategy and effective cost-control measures. The Zacks Consensus Estimate for earnings per share (EPS) for fiscal 2023 has increased to $13.59 from $12.57 over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KB Home has been gaining from its Returns-Focused Growth Plan, which includes the execution of its core business strategy, improving asset efficiency and monetizing significant deferred tax assets. Its EPS estimate for fiscal 2023 has increased to $6.92 from $6.29 over the past 30 days.
Meanwhile, spec strategy implementation and focus on the growing demand for entry-level homes with its LiVE.NOW products have been benefiting Meritage Homes. However, this Zacks Rank #3 (Hold) company remains vulnerable to higher mortgage rates, supply-related constraints, and higher land, labor and material costs.
On the other hand, D.R. Horton and PulteGroup currently carry a Zacks Rank #4 (Sell). Above-mentioned headwinds have been impacting these homebuilders. D. R. Horton’s consensus mark for fiscal 2023 EPS has remained unchanged at $13.27 over the past 60 days, limiting the upside potential for the stock. Again, PulteGroup’s consensus mark for 2023 EPS has declined to $11.58 from $11.62 over the past seven days, depicting analysts’ concern over the company’s growth prospects.