Homebuilder stocks have been one of the brightest spots in the market's rally, but news out Tuesday shows the sector remains sensitive to interest rates and their influence on the housing market.
Shares of D.R. Horton (DHI) sank by 9% Tuesday after the homebuilder reported weaker-than-expected quarterly orders and posted first quarter earnings per share that missed analyst estimates. Investor reaction also dragged down the SPDR S&P Homebuilders ETF (XHB) by as much as 3%.
Both XHB and D.R. Horton closed at record highs on Monday.
Specifically, D.R. Horton said on its call with analysts it would be cautious in making changes to its concession strategy — which consists of mortgage rate buydowns that hurt margins but make homes more affordable for buyers — should mortgage rates stall in marching lower.
"The use of those rate buydowns is not just new to us over the last 12 months," CEO Paul Romanowski said on Tuesday. "We've been 24-plus months utilizing that incentive. So I believe on a go-forward basis, staying competitive to not only the new home market, but especially to the resale market for us, and the ability to have a lower monthly payment for same cost of home is advantageous. So we have no plan in the near term to stop utilizing it even if we see rates shift down."
Read more: 5 strategies to get the lowest mortgage rates in 2024
This commentary differs from that offered by KB Home (KBH) earlier this month, which hinted at a pullback in incentives for the first quarter of this year.
Mortgage rates fell to a seven-month low last week of 6.6%, down from 6.66% in the prior year and the 7% seen in September.
But longer-term interest rates, which feed into mortgage rates, have risen of late as investors grow less optimistic about interest rate cuts from the Federal Reserve kicking off in March.
Despite the weaker print from D.R. Horton, new construction has been a key source of boosting housing inventory as supply on the resale market slumped to the worst level in decades last year. In response, homebuilders across the country have been rolling out juicier incentives to spark buyer interest and ease the sticker shock of higher rates and home prices.
Going forward, DHI said it expects home closings of 87,000 to 90,000 this fiscal year, higher than its previous guidance of 86,000 to 89,000.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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