Headwinds Facing Home Builders
The home building sector has faced several headwinds in recent months. Rising mortgage rates, which have reached their highest levels since before the Great Financial Crisis, have had a significant impact on the sector. This increase in mortgage rates has led to a decline in existing home sales, as affordability has become a major concern for many potential homebuyers. In addition, high mortgage rates and rising home prices have contributed to historic highs in housing unaffordability, making it difficult for many people to purchase a home.
Mortgage Rates:
One of the most significant challenges facing the home building sector is the increase in mortgage rates. Average 30-year mortgage rates have recently surged above the 7% level, the highest level since November and more than double where rates were when the Federal Reserve began its current monetary tightening program in March 2022. This increase in mortgage rates has made it more expensive for potential homebuyers to purchase a home, leading to a decline in demand for new homes.
Housing Affordability:
High mortgage rates and the rising cost of an average home since the pandemic have both contributed to the historic highs in housing unaffordability. This has made it difficult for many people to afford to purchase a home, further impacting demand for new homes. As long as mortgage rates and home prices remain high, housing affordability will continue to be a major headwind for the housing sector.
Incentives Rising:
Historically, high housing unaffordability has led to increasing incentives given by home builders to move their inventory. These incentives can include mortgage buy downs, free or heavily discounted upgrades, and assistance with closing costs. While these incentives can help to move inventory, they can also negatively impact home builders’ margins.
Tailwinds for Home Builders
Despite the headwinds facing the home building sector, there are also some positive factors to consider.
Solid Balance Sheets:
Unlike at the end of some previous housing cycles, the balance sheets of the major home builders are in very solid shape. This should help them to weather the current downturn in the market and position them for growth when the market recovers.
Lumber Prices Dropping:
Another positive for the sector is that lumber prices have been falling recently. Lumber prices have dropped to around $500 per thousand board feet, their lowest levels since November of 2023. This should help to improve margins for home builders, as lumber is a key component in the construction of new homes.
Conclusion:
The home building sector is facing a number of headwinds, including rising mortgage rates, housing affordability, and increasing incentives. However, there are also some positive factors, such as solid balance sheets and falling lumber prices, which could help to support the sector in the long term. Overall, the sector is likely to face continued challenges in the near term, but it is well-positioned for growth when the market recovers.
