Investors will closely scrutinize the earnings commentary of PulteGroup (ticker: PHM), one of the nation's largest home builders, on Tuesday to assess the effects of higher rates in the new year.
Earnings Expectations
According to FactSet, Wall Street analysts anticipate that PulteGroup earned $2.83 per share on revenue of approximately $4.1 billion in the third quarter. This projection is higher than the earnings of $2.69 per share on $3.9 billion in revenue recorded during the same quarter in 2022.
Additionally, analysts predict that PulteGroup received 6,589 new orders and successfully delivered 7,297 homes to customers. The expected home builder gross margin stands at 29.3%.
Impact of Rising Mortgage Rates
Throughout the second half of the year, mortgage rates have been steadily increasing, surpassing 7% in August. The upward trend has adversely affected sales of existing homes, which comprise the majority of all home purchase transactions in the market. In fact, September witnessed the lowest number of completed transactions since late 2010, according to the National Association of Realtors.
However, the impact of rising mortgage rates on new home sales is expected to differ. Pending-home sales, which gauge deals for previously owned homes yet to close, are projected to have declined by 1.5% in September to reach their lowest level on record. In contrast, new-home contract signings are anticipated to have increased by 0.7% compared to the previous year, indicating a rise of approximately 20%. Both reports highlighting these findings are expected to be released later this week.
Builders and the Mortgage Rate Effect
Although builders have benefited from buyer demand in a housing market marked by limited supply, they are not immune to the consequences of rising mortgage rates. In October, the National Association of Home Builders' measure of industry confidence plummeted to its lowest level since January.
Consequently, builder margins may be negatively impacted. While homeowners with exceptionally low mortgage rates may opt not to sell their properties rather than lowering prices or seeking buyers, builders may resort to price reductions and incentives, such as mortgage rate buy-downs, in order to maintain sales momentum.
The coming earnings announcement by PulteGroup will offer valuable insights into the repercussions of higher mortgage rates on the home building sector. Investors are undoubtedly awaiting these results with great interest.
New Home Builders Offering Incentives to Attract Buyers
Recent reports indicate that an increasing number of builders are implementing incentives to entice prospective buyers into purchasing homes. According to a survey conducted by the Home Builders trade group, 30% of builders lowered home prices in October. In addition, approximately three in five builders stated that they provided buyer incentives on a broader scale.
UBS analysts, John Lovallo, Spencer Kaufman, and Matthew Johnson, have adjusted their 2024 builder estimates and price targets to reflect the probability of "higher-for-longer" interest rates. They believe that such rates will require additional rate buydowns and incentives to sustain volume. As a result, the analysts have lowered their expectations for home building gross margins by an average of 1.4 percentage points.
New homes experienced increased demand earlier this year as rising mortgage rates during the pandemic discouraged potential sellers and motivated home buyers to consider new-home constructions. This surge in industry sentiment propelled builder stocks and led to closing highs for two exchange-traded funds: the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), in August 2023.
However, builder sentiment and stocks have declined since then due to the rise in mortgage rates. As of Friday's close, both exchange-traded funds have experienced approximately a 17% and 19% decrease since their 2023 closing highs, although they remain positive for the year.
The UBS analysts anticipate that investor focus will shift from financial reports to commentary on buyer trends and the trajectory of builder gross margins. Despite this shift, they maintain a positive outlook on builders due to factors such as the limited availability of existing home inventory, strong balance sheets, and procurement/financing advantages over private peers.
