Demand for new homes has fallen significantly in the United States in recent months. A clear example is that of the construction company KB Home, based in California, in the data from the fourth quarter of last year. This has come hand in hand with the increase in mortgage rates, which has affected all builders.
Rates on new mortgages have receded, offering some optimism to investors, but analysts say it may be too soon to be confident of an easy one on the housing market. KB Home last week submitted a demand for 692 new properties in the quarter, which is less than half the 1,964 expected by the FactSet consensus estimates, and around 80% less than the same quarter of the previous year. The net decline was due to a combination of low gross orders and an increase in cancellations, according to the company’s CEO, Jeffrey Mezger.
The quarter, which ended on November 30, reflects a time when 30-year fixed mortgages were close to or above 7%, according to data from Freddie Mac: a major spike, after rising rates interest rate from the Federal Reserve, which endured its monetary policy to control inflation.
“High mortgage rates and persistent inflation, coupled with an uncertain economy, have made homebuyers more cautious since the middle of last year,” Mezger said in a statement. “In the fourth, we prioritized delivering our large backlog and protecting our high margins rather than taking steps to stimulate additional sales in this seasonally slower time period,” he noted.
But KB Home is not the only builder to experience a slowdown in demand at the end of the 2022 quarter.
“As a first strategy, we detail that we will continue to sell houses and adjust prices to market conditions and maintain a reasonable volume,” said the president of Lennar, Stuart Miller, during the conference presentation of the company’s accounts. That means the company’s margins, not its volume, are the “known buffer,” he added. Lennar’s gross margin on home sales fell to 24.8% in its most recent quarter from 28% in the same period last year.
DR. Horton, the nation’s largest listed homebuilder, will publish its quarterly results on January 24 for the quarter ended December 31. Analysts expect them to report 14,890 new orders, a 31% decrease from the same quarter last year, and a margin of 23.5%, up from 27.4% in the first quarter of 2022, according to FactSet data.
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The impact of rising mortgage rates at the end of 2022 was wide-ranging, affecting both existing home sales and builder confidence. The former fell for the tenth consecutive month in November. As for builder sentiment, measured as an index by the National Association of Home Builders, it fell every month in 2022, according to the organization.
“In this environment of high inflation and high mortgage rates, builders are struggling to keep homes affordable for buyers,” Jerry Konter, president of the National Association of Home Builders, said in a statement last month. He added that 62% of builders reported using incentives to improve sales, while 35% cut prices.
However, there could be better news for this 2023, according to some experts. The end of 2022 could have been the nadir for demand for new real estate, says Bank of America’s analyst and strategy team. Bank analysts Rafe Jadrosich and Shaun Calnan, and strategist Chris Flanagan wrote. “Orders will improve sequentially in 2023,” they predicted.
Citi analysts also expect orders to improve. The Citi Research team led by Anthony Pettinari stated that it would be necessary to be “selectively positive” with the builders on the stock market, favoring PulteGroup. “The spring selling season should be weak, but the net order season in the second half should be a catalyst,” he wrote.
One reason for optimism in the housing market could be the downward trend in mortgage rates since reaching the 7% level. “Mortgage rates have declined from peak levels and are set to decline in 2023,” the BofA team analyzed. Builder valuations would already be pricing in lower prices and weaker demand, as outlined in the report, while builder margins could be helped by lower material costs.
Of course, the BofA team is not the only one that expects mortgage rates to drop. After the latest CPI data in the United States, which continued to cool in December, the chief economist of the National Association of Realtors, Lawrence Yun, assured that mortgage rates could fall below 6%: “Inflation has been coming down. Therefore, mortgage rates will also go down.”
What should be qualified is that the recent fall in mortgage rates has not allayed concerns about affordability. “Despite the recent decline in mortgage rates (over 6.5%), payment/income ratios remain uncomfortably above previous 2006 peaks,” Horne said. “Home sales activity and buyer traffic remain in shock going into 2023, and real estate markets across the country will remain in ‘price discovery’ mode,” she added. Now it only remains to be seen where it will end up breaking this year.
