Homebuilders are feeling the pressure as interest rates are rising, which means home prices are climbing as well and discouraging potential buyers. On November 8, mortgage buyer Freddie Mac said that the rates on fixed rate 20-year mortgages hit a seven-year high of 4.94%. A year ago, the rate was down to 3.9%. D.R. Horton, a homebuilder, said that home deliveries in the next quarter will come below what Wall Street is expecting, and it is due to mortgage rates and home prices.
D.R. Horton fell in the stocks, along with other major players. D.R. Horton shares fell 5%, while the others fell between 2% and 4%.
Home prices slowed down for the fifth straight month in August, but for the last five years, they have been running ahead of wage gains in the country. Many people are priced out of the market from the beginning. There aren’t enough affordable homes, especially for first time buyers. Combined with the increased cost of borrowing money, this has created a situation where many potential buyers are being forced out of the market.
The Commerce Department said in October that the sales of new U.S. homes went down 5.5% in the month, which was the fourth month in a row that this drop occurred. The annual rate of home sales has gone down 15.3% since May.
Many homebuilders believed that a stronger economy would help with home sales, but it turns out that newly constructed homes are some of the toughest to sell. There is a supply of 7.1 months worth of new homes on the market currently, and that is the highest level since March 2011. Even though new homes are a tough sell, the sales of existing homes haven’t done much better and sales on existing homes have fallen for six straight months.
The Federal Reserve has been slowly raising short-term interest rates to help cool down on the economic expansion. The next time rates are supposed to rise are this December. Economic experts also expect at least two hikes next year, which may further build pressure for homebuilders.
While there has been some chatter about sales of newly built homes going up and home construction bouncing back, the pressure is definitely on as homebuilders need to adjust to higher material costs, including lumber and rising labor wages. In September, the homebuilder confidence was at one of its lowest levels due to the performance of homes for sale. The industry is also dealing with the higher cost in materials, due to tariffs and increased threat of tariffs. In addition to homebuyer sentiment being lower this year, homebuilder sentiment was at a low in August.
Despite home builder marketing, and working to find buyers, homebuilders will have to look at additional ways to entice buyers into the new home. This creates new challenges as so many are pushed out of the market. Even though there is a demand for houses, thanks to steady job growth and income growth, buyers are more concerned about affordability. This means that the rise in material and land costs need to be taken into account.