Home builders: what happened? I wrote a couple weeks ago that a move from 3.5 percent to 4.5 percent on a 30-year mortgage was unlikely to derail the home-building business on a long-term basis. I stick by that call, but it does appear to have hurt in the short term, and with a particularly important segment of the home buying population: first time buyers.
DR Horton (DHI) is the home builder that is probably most associated with the first-time buyer. This morning, both they and PulteGroup (PHM) reported new orders (a key metric) below expectations. How bad was it? The Street was looking for order growth of 25 percent, they printed 13 percent.
On the conference call, Horton said that higher rates had increased cancellations. How much? It looks like cancellations went from about 20 percent to about 25 percent. Bear in mind, during the financial crisis of 2008-2009, cancellation rates reached the high-30 percent levels, so it may not sound like going from 20 to 25 percent is a big deal. Still, it is significant. With nearly 7,000 homes sold, a five percent reduction would be a loss of 350 homes.
So, what does this mean for investors? First, estimates are going to be coming down. Sterne Agree reduced the target price to $27 from $32 this morning.
Second, investing in home builders will be tough until:
- We see Q3 numbers, and
- Determine if the Federal Reserve will push to keep rates down.
I say this because the Fed, knowing how obsessed they are with housing, will not stand idly by if there really is an impact from higher rates.