Homebuilders Report Sales Gains As Existing Supply Lags Article originally posted on CoStar on April 26, 2024 High mortgage rates, near-record-high home prices and a historic undersupply of houses are leaving few bright spots in the U.S. market. But one industry is thriving under the current conditions: homebuilders. As the biggest of those companies, such as D.R. Horton and Lennar, share their first-quarter earnings, they are reporting increased sales and orders — and in some cases are raising their guidance for the coming year. Executives and analysts have credited the tight existing homes market — partly due to the so-called lock-in effect, the low mortgage rate locked in by some homeowners during the pandemic — for these gains. As a result, demand is moving toward newly constructed available housing, and homebuilders are cashing in. In March, existing home sales fell 4.3%. That’s a smaller drop than analysts expected, but if sales continued at March’s annual pace, the market would have about 3.2 months supply of existing homes to satisfy demand, an amount that’s only about half the six months of supply some analysts view as healthy. At the same time, newly built single-family homes in March posted the largest monthly increase in over a year, reaching the highest annual rate in six months. These conditions have bolstered the market for homebuilders, according to executives and analysts. “We are in the best financial condition in our history,” M/I Homes CEO and President Robert Schottenstein said during an earnings call Wednesday after the Columbus, Ohio-based homebuilder reported “first-quarter records in homes delivered, revenue and income.” Lennar also reported an increase in first-quarter home sales, new orders and revenue on March 14. “We have seen overall market conditions remain generally constructive for the industry,” Stuart Miller, co-CEO and executive chairman of the Miami-based builder, said during an earnings call. “Even though higher interest rates have remained sticky, strong pent-up demand has found ways to access the housing market. Given consistent execution, we are extremely well-positioned for even greater successes as strong demand for affordable offerings continues to seek short supply.” Financial Incentives Some builders have been able to navigate the complicated market by offering buyers incentives to offset rising prices, a move that has contributed to growth in newly built home sales, according to Wells Fargo economists. They said builders have used “price discounts, mortgage rate buy-downs and other incentives,” helping the market “digest the higher interest rate environment relatively well.” Builders were willing to ease their incentives as mortgage rates moderated between November and March. That could change because of a recent uptick in rates. “If mortgage rates continue to creep up, builders may be forced to step up the use of incentives. Builders pulled back from offering price cuts earlier this year as mortgage rates seemed to stabilize,” Wells Fargo economists added in their commentary. In April, only 22% of builders reported cutting their prices, according to the National Association of Homebuilders. That’s down from 24% in March and 36% in December. D.R. Horton, the nation’s largest homebuilder, said it plans to rely on incentives to lure buyers. The Arlington, Texas-based company raised its sales expectations after reporting year-over-year gains in first-quarter revenue and sales orders. The builder anticipates incentives will be a “wild card” dependent on market conditions in coming months, Jessica Hansen, D.R. Horton’s senior vice president of investor relations, said during the company’s earnings call. Builders are still finding ways to maintain, and in some cases increase, their margins — even while implementing incentives. M/I Homes, for example, said it plans to keep up its aggressive approach in offering financial incentives that are tailored to specific communities and markets. “It’s not like spreading peanut butter,” Schottenstein said during Wednesday’s earnings call. “We try to be very, very targeted and focused.” Potential Threats To be clear, the industry is still facing various potential barriers. The latest bump in the road: elevated mortgage rates. As of the week ended April 18, the 30-year-fixed-rate mortgage average climbed to 7.1%, the highest it’s been this year. Most analysts now expect that rates will remain higher for longer as the Federal Reserve further prolongs cutting the federal funds rate that affects mortgage rates. PulteGroup reported its home sales revenue expanded 10% year over year to $3.8 billion in the first quarter. But buyer traffic at its in-person sales centers has moderated over the past several days as rates have climbed, executives at the Atlanta-based company said during an earnings call Tuesday. Website traffic has remained steady, though, indicating the desire for home ownership and the company and industry at large are still in a “strong operating environment.” Analysts are also wary that growth in the resale market — still very tight — could threaten the strength of the newly built homes market. Executives at M/I Homes said recent expansion in the resale market combined with mortgage rates could be affecting the new homes market, but “the fundamentals still point in the right direction.”