How homebuilder earnings are reflected in housing market

Homebuilders fared well in the third quarter of 2023 on selective housing demand, while mortgage rates continued their climb toward 8%. Whirlpool (WHR) CEO Marc Bitzer went so far as to characterize the U.S. housing market's dual nature as "Dr. Jekyll and Mr. Hyde" in an interview earlier this week.

Yahoo Finance Housing Reporter Dani Romero breaks down the top themes and takeaways from homebuilders' assessment of the market, including affordability and home improvement trends.

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

Video Transcript

SEANA SMITH: Well, the string of homebuilders reported third quarter results earlier this week, blowing past the Street's expectations and also further fueling analyst sentiment to remain upbeat amid rising rates. Yesterday we spoke with Whirlpool's CEO about the trends that he's seeing within the housing market. Here's what he had to say.

MARC BITZER: For probably lack of a better analogy, I would call right now the housing market Dr. Jekyll and Mr. Hyde, and the reason why I'm saying this is you have two sides. The new housing you all have seen the order intake is solid, because there's a structural demand, strong demand for new housing.

The other side is existing home sales, which is a very, very big part of our overall demand, and existing home sales, as you've all seen, are now sub 4 million. That's-- You have to go back, all the way back to 2010. So you have this odd situation where you have a structural undersupply of a market, which drives positive on new home. These are two very kind of opposing trends right now. Over time and the long term, we see that repeatedly. We're very bullish on the mid and long term US housing.

SEANA SMITH: Yahoo Finance's Dani Romero joining us now for more on her biggest takeaways that we've heard so far from third quarter results. Dani.

DANI ROMERO: Seana, homebuilders pulled out all the tools from their toolbox in this third quarter. This week, PulteGroup, NVR, Taylor Morrison, Century Communities all reported third quarter earnings, and Wall Street is digesting this week's results. And if we take a look at those homebuilder stocks, not too upbeat. They're down right now today, but moving forward, there were a couple key themes discussed across the board on all the calls.

First, incentives. What were those incentives? Closing cost credits, interest rate locks, buy downs, a really big strategy to help buyers bring them into the market and allow them to have a lower mortgage rate than the market level. Taylor Morrison said on their call that financial incentives outweigh price reductions. That is a really key and important color when how homebuilders are really looking at the next quarter and how they're thinking about this high interest rate environment.

Another key theme that was discussed is home prices. They were modest this quarter, but others like Century Communities, they actually were able to increase their home prices by about 4% this quarter. That's-- so that's a little bit giving you some context there.

Another thing over the last quarter is that homebuilders have really changed up their strategy. They've implemented a spec home order strategy, which means that they don't really have a buyer in mind. And another strategy that they're using is the build to order strategy, which allows customers to customize their home. And so some builders have really pointed out that that has allowed them to accommodate their buyers across the board, and first-time homebuyers are actually more inclined to buying a spec home than a customized home, because at the end of the day, that could cost them a little bit more.

Another factor that was really discussed throughout is seasonality. Remember, the third quarter ranges from July, August, September, and the summer months are really, really important to the housing market because a lot of people move during that time ahead of the start of a new year, Seana.

SEANA SMITH: So, Dani, you talked about, obviously, the summer months and how crucial those are, and we've just dug through the third quarter. How does this bode for the fourth quarter for this sector?

DANI ROMERO: Looking forward into the fourth quarter, some executives really pointed out that the first few weeks of October have actually been very choppy when it comes to the sales volume, so that could be something that Wall Street is actually factoring in right now if we take a look at those stocks. They're down right now.

But on the positive side, net orders across the board have improved. And also, some of them have actually bumped up their full year guidance on how many homes will be delivered to the market. So that could be something to really look on forward and-- but again, there could be some bumpiness in this fourth quarter given the fact of rising mortgage rates.

SEANA SMITH: All right. Dani Romero, thank you so much.