DR Horton earnings: Homebuilders react to mortgage rates

DR Horton (DHI) stock falls after reporting mixed fiscal first-quarter earnings results, topping revenue estimates. Yahoo Finance Housing Reporter Dani Romero explains how mortgage rate buydowns and Federal Reserve interest rate cut timelines are resonating throughout the US housing market and homebuilding stocks.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: Shares of DR Horton down today, following a mixed earnings report. And on the call, the company announcing they're sticking to their incentive strategy of offering mortgage rate buydowns despite rates slowly decreasing. For more, Dani Romero of Yahoo Finance joining us right here. So explain this situation to me, these buydowns that they're doing.

DANI ROMERO: Yeah, DR Horton, really the weaker results really does highlight the big divide among homebuilders right now, on whether or not to keep incentives where they're at, keep going with them, or pull back as mortgage rates are moving down lower. DR Horton made it very clear that they are sticking to their plan, and they are not pulling back on incentives, even if mortgage rates do come down.

And we have seen that mortgage rates have come down from their highs last year. They're no longer hovering around that 8% or even 7%. They're now hanging around the 6% range, which brings up the big Wall Street debate. If mortgage rates do come down, what does that mean for homebuilder incentives? Incentives have been such a big game changer for these homebuilders as the resale market has slumped last year.

And if they do pull back, what does that mean for demand, foot traffic, all those different things? Obviously, it would be a positive to their gross margins because that's been a bit of a squeeze, these quarters. But by contrast to one homebuilder, did come up front. KB Home, that homebuilder said that they are going to pull back on incentives this year. Will they actually execute it? We'll have to wait and see.

But the big bottom line-- the bottom line is that investors are not as optimistic that the Fed will cut interest rates in March. And we have seen those long-term rates rise, which do feed into mortgage rates. So that does leave uncertainty on whether or not the homebuilders will be able to accommodate these buyers. And where will mortgage rates even land?

JOSH LIPTON: All right, Dani Portman, thank you for bringing it to us. Appreciate it.