On paper, the U.S. housing market remains constrained. Last week, mortgage purchase applications were down 35% on a year-over-year basis, as spiked mortgage rates continued to keep some buyers on the sideline, while the number of homes for sale in March 2023 was 20% below levels seen in March 2022 as “move-up” sellers refuse to swap their mortgage rates of around 2% to 3% for something in the 6% range. But a constrained national housing market doesn’t equal a crashing housing market. At least that’s the message from Wall Street, which has helped to push up the share price of major homebuilders, like D.R. Horton and Lennar, back near their all-time highs.
So what are investors seeing that buyers and sellers aren’t? The new-home market has gained an advantage over the existing-home market. Not only does the existing/resale market have little inventory available for sale, it has also been stickier on the price side, with many sellers refusing to budge. That lack of competition, coupled with sky-high existing home prices, gives builders an edge if they’re able to offer some discounts like mortgage rate buydowns.
Following the 2000s housing boom, which topped out in 2007, builders across the country wiped out as their rampant overbuilding turned into a supply glut, which of course only exacerbated the crash. Fast-forward to the Pandemic Housing Boom, and builders were better positioned for a shift from boom to slump in 2022. This time around, there was neither a building glut of inventory nor a subprime mortgage crisis.
“They’re [builders] working with [profit] margins that allow them to do those things [offer discounts]. They do have budgets for incentives, where they’ll spread around where it’s most effective. They have to move forward,” Jeff Grenz, a custom builder in Sacramento, tells Fortune. “The bottom line this year might not be as great, but they’ll still move forward and make those sales happen. Besides, in a lot of cases, they’re it. Resale isn’t putting inventory on the market.”
During the Pandemic Housing Boom—a period of seemingly unlimited housing demand—builders including D.R. Horton and Lennar achieved frothy profit margins as they swiftly jacked up their prices. That is coming in handy right now: Those sky-high profit margins gave builders 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. And it’s working.
Homebuilder stocks might also be trying to tell us something else: The worst of the housing slump could be in the rearview mirror.
The reason? Last year's mortgage rate spike—the culprit of the housing slump—is beginning to lose its punch. Over the past five months, the average 30-year fixed mortgage rate has slowly come down from its November high of 7.37% to 6.44% as of Monday. That mortgage rate dip, coupled with rising incomes and national home prices falling a bit from the peak, has seen housing affordability improve just enough to get some buyers back into the market.
Want more proof that the worst of the storm might be behind us? Just look at homebuilder cancellation rates.
Builders surveyed by John Burns Real Estate Consulting in February had an aggregate cancellation rate of 10.8%. That's far below the peak of 24.6% hit in October, and just slightly above the 7.3% hit at the height of the Pandemic Housing Boom in February 2022.
Not to mention, existing home prices are rising again this spring in many Midwest and East Coast housing markets.
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