The housing market is shifting—just look at earnings published by 2 giant Fortune 500 homebuilders
There's no doubt about it: The second half of 2022—a period that saw mortgage rates top 7%—was absolutely brutal for the housing industry. Look no further than PulteGroup's fourth-quarter earnings, which saw its buyer cancellation rate soar to 32%—or nearly three times greater than the 11% cancellation rate it saw in the fourth quarter of 2021.
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"Federal Reserve actions to fight inflation through higher interest rates continued to impact homebuying demand in the [fourth] quarter," PulteGroup told investors in January.
However, that's already old news: Through the first few months of 2023, giant builders across the country are seeing their fortunes improve as buyer demand stabilizes.
Case in point: A pair of homebuilders on the Fortune 500 list, No. 124 D.R. Horton and No. 267 PulteGroup, just reported a big drop in cancellation rates. D.R. Horton's cancellation rate for the first three months of 2023 came in at 18%—down from the 27% rate just one quarter earlier. Meanwhile, only 13% of PulteGroup's buyers canceled their home contracts in the first quarter of 2023—well below the 32% cancellation rate it saw in the fourth quarter.
What's going on? Two things.
First, the national U.S. housing market stabilized this year as we entered the busier spring season. Mortgage rates falling back under 7%, coupled with a lack of existing home inventory, has done just enough to put the market back into equilibrium.
Second, homebuilders have recently gained an edge over the existing/resale market. During the Pandemic Housing Boom—a time with seemingly unlimited housing demand—builders achieved frothy profit margins as they quickly raised new house prices. Those frothy margins are coming in handy for builders: As mortgage rates spurred a housing downturn last year, builders like D.R. Horton and PulteGroup had the breathing room to reduce margins (i.e. cutting prices and/or aggressive rate buydowns) in pursuit of finding the market, or the price point at which buyer demand would return. Of course, those rate buydowns now give builders an edge over average Joes trying to sell their house.
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Giant builders like D.R. Horton and PulteGroup aren't outliers: Builders from coast to coast are seeing an uptick in buyer demand.
Builders surveyed by John Burns Research and Consulting in March had an aggregate cancellation rate of 9%. That's far below the peak of 24.6% hit in October, and just slightly above the 8% hit at the height of the Pandemic Housing Boom in March 2022.
"For perspective on just how much things have improved, Phoenix cancellations hit 60% in November 2022 and are currently [at] 15%," Rick Palacios Jr., director of research at John Burns Research and Consulting, tweeted on Sunday.
Indeed, even KB Home, a builder with significant exposure in slumped Mountain West markets like Boise, saw its first-quarter cancellation rate come in at 36%—or nearly half the 68% rate it saw in the fourth-quarter of 2022.
"As we entered the spring selling season during the quarter, we began to see an increase in [housing] demand. This reflected in part the targeted sales strategies we deployed, together with a stabilizing mortgage interest rate environment. As a result, we achieved a sequential improvement in our net orders in both January and February, and net orders have remained strong in the early weeks of March. Although there are still considerable interest rates and economic uncertainties, we are encouraged by this progression," Jeffrey Mezger, CEO of KB Home, told investors in March.
On one hand, the national housing market has stabilized this spring. On the other hand, housing affordability (or lack thereof) remains at levels not seen since the housing bubble era.
In order to reach more priced-out buyers, some builders are pivoting from larger single-family homes to smaller townhomes.
"We just closed all our backlog from dirt buyers who bought in March-May of 2022, which was where most of our cancels were coming from. They literally bought at the peak," Tyler Watkins, a new-home consultant at M/I Homes in Columbus, Ohio, tells Fortune. "Helping first-time buyers is still the hardest to help because pricing still is high. Cancels have drastically decreased since January of this year. One thing you’ll see is builders going to townhome products for affordability. Every builder here will be selling townhomes by summer of this year."
Want to stay updated on the housing cycle? Follow me on Twitter at @NewsLambert.
This story was originally featured on Fortune.com
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