Housing analysts: Mortgage rates remain the biggest question mark for homebuilders

In This Article:

Is there more upside to homebuilder stocks this year? That's the question investors are hoping the upcoming earnings season will answer as mortgage rates remain at 23-year highs.

So far, large-cap homebuilder stocks have averaged an increase of 34% this year as of Oct. 17, according to a recent JPMorgan note, while the small-cap ones climbed 24.2% on average.

This week, PulteGroup (PHM), NVR (NVR), Taylor Morrison Home Corp. (TMHC), Century Communities (CCS), and Tri Pointe Homes (TPH) all report third quarter earnings. Meritage Homes Corp. (MTH) and LGI Homes (LGIH) follow next week, with D.R. Horton (DHI) capping off the streak on Nov. 7.

The results should portend how homebuilders will fare the rest of the year and into next as mortgage rates approach — and potentially stay at — 8%, home prices remain high, and seasonality sets in.

Read more: Mortgage rates at over 20-year high: Is 2023 a good time to buy a house?

"We are inclined to believe the current rate levels may be the upper bound of affordability for consumers," Jay McCanless, senior vice president of Equity Research at Wedbush, wrote in a note to clients. "We see that as an important question for all of the builders."

Mortgage rates seesawed much of the first half of the year between 6% and 7%. The levels were too high to convince homeowners to sell and sacrifice their much lower mortgage rate, leading to historically low inventory of previously owned homes on the market.

As a result, new construction became the bright spot for many wannabe buyers, surprising analysts this spring.

Newly built homes accounted for nearly one-third of single family homes for sale nationwide in the second quarter, according to the residential real estate brokerage Redfin. New home sales are now up 2% this year compared to 2022 levels, per Morgan Stanley data released Oct. 13. The newest data comes out on Wednesday.

Read more: How to buy a house in 2023

Meanwhile, existing home sales in September remain 15.4% lower than a year ago.

"New homes increasingly represent the only game in town," Sam Reid, Wells Fargo equity analyst, wrote in a note to clients.

Builders also adjusted to higher mortgage rates by pitching incentives to buyers to reduce the interest rate on their home loan — called a mortgage rate buydown.

"Builders have a built-in advantage in a high rate environment via rate buydowns — offering a competitive alternative to both resales and apartments," Reid said.

More recently, mortgage rates have soared higher. The average rate on a 30-year fixed mortgage increased to 7.57% last week, according to Freddie Mac. The rate has stayed above 7% for 10 weeks, a span not seen since the last months of 2000.