Here's another red flag for housing from the largest home builder

·3 min read

The largest U.S. homebuilder offered up the latest examples of how quickly buyers are fleeing the housing market.

Buyers canceled nearly a third of deals in D.R. Horton Inc.'s (DHI) fiscal fourth quarter, up from 19% a year ago, the Texas-based company said Wednesday. New orders declined 15% to 13,582 homes from a year earlier, down by 10% in value.

The company is responding by walking away from land deals that don’t meet certain metrics as the market has shifted, writing off $34 million of deposits and expenses tied to the transactions, and offering more incentives to sellers to close deals.

“As we evaluate projects at various decision points, we'll be working with various land sellers and developers and where we can't reach an agreement on our accommodation, we're not going to move forward with a bad deal,” Michael Murray, executive vice president and co-COO of D.R. Horton Inc., said on the earnings call Wednesday morning.

PHOENIX, AZ - MARCH 05:  A worker climbs on the roof of a home under construction at the Pulte Homes Fireside at Norterra-Skyline housing development on March 5, 2013 in Phoenix, Arizona. In 2008, Phoenix, Arizona was at the forefront of the U.S. housing crisis with home prices falling 55 percent between 2005 and 2011 leaving many developers to abandon development projects. Phoenix is now undergoing a housing boom as sale prices have surged 22.9 percent, the highest price increase in the nation, and homebuilders are scrambling to buy up land.  (Photo by Justin Sullivan/Getty Images)
A worker climbs on the roof of a home under construction at the Pulte Homes Fireside at Norterra-Skyline housing development on March 5, 2013 in Phoenix, Arizona. (Photo by Justin Sullivan/Getty Images)

The historic increase in mortgage rates this year, sparked by the Federal Reserve’s aggressive campaign to tame inflation, has pulled back housing demand and crushed builder confidence.

The average rate on a 30-year fixed-rate mortgage sits near 7%, according to Freddie Mac. A year ago, it was less than half that at 3%. Expensive borrowing costs have slumped mortgage demand, which slipped to a 22-year low, per the Mortgage Bankers Association, and prompted brokerage firms, including Redfin on Wednesday, to eliminate portions of their workforce.

“The rapid rise in mortgage rates, coupled with high inflation and general economic uncertainty, have made many buyers pause in their home-buying decision or choose to not move forward with their home purchase,” President and CEO David Auld said in a conference call to discuss earnings.

D.R. Horton quarterly results — which missed on earnings and revenue — also echoed what Pultegroup (PHM) previously reported in its latest earnings release. Order cancellations increased 24% in the period, up from 15% in the second quarter and 10% a year ago, the Atlanta-based builder reported in October, while purchase contracts fell 28% from a year ago.

As a result, the homebuilder is trying to pivot by increasing incentives and shift from mortgage rate buy-downs to price cuts. A similar move was also shared by D.R. Horton, which is “offering mortgage interest rate locks and buy-downs and other sales incentives to address affordability concerns and to drive sales traffic to our communities,” Bill W. Wheat, executive vice president and CFO, said.

Wall Street analysts say it will come down to “stabilization” in rates for home builders; otherwise it will be a long road ahead.

“What it's going to come down to is we need a stabilization [of] rates — full stop — that's what we need,” John Lovallo, an UBS analyst, told Yahoo Finance. “If rates were to continue to go up from here, it's going to be very challenging. If we do get some stabilization, or God forbid, a little bit of decline in rates, it could unleash some pretty significant demand."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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