Demand for housing is difficult to predict, even though mortgage rates have fallen. Just look at homebuilders’ quarterly results so far this earnings season.
Two of America’s largest homebuilders, Lennar (LEN) and KB Home (KBH), reported net new home orders in the third quarter that fell short of Wall Street expectations.
Net new orders represent the number of new sales contracts completed and signed by buyers minus customer home order cancellations booked for the period. Investors and analysts pay close attention to this number because it is a leading indicator of homebuilding activity for homebuilders.
Lennar, the nation’s second-largest homebuilder, said last month that net new orders for the quarter ended Aug. 31 rose 4.7% from the previous year to 20,587. That fell short of analyst forecasts of 20,827 orders, according to Bloomberg data.
Housebuilder KB Home also reported in September that net orders for the period ending August 31 were a disappointment. The builder said orders fell 0.4% from the previous year to 3,085, below analyst estimates of 3,345 orders.
Part of the reason for the misses is that it’s difficult to determine how much recent mortgage rate moves would impact buyer demand. Mortgage interest rates remained stuck between 6% and 7% this year. And in June the rates changed just above or below 7%.
Read more: When will mortgage interest rates go down? A look at 2024 and 2025.
“Maybe we should be ashamed of ourselves for not modeling it more clearly, but June and July were clearly challenging months,” John Lovallo, senior equity research analyst at UBS, told Yahoo Finance in an interview.
From the buyer’s perspective, there was “uncertainty about where interest rates were going. There was uncertainty about where the economy and the Fed were going, and there was growing uncertainty about the election,” Lovallo added.
The uncertainty does not seem to disappear, despite the major interest rate cut by the Federal Reserve in September. Mortgage interest rates were already falling, as investors had bet on a future rate cut.
It is unclear how much they will fall. Freddie Mac data shows that the average 30-year fixed mortgage rate rose 20 basis points last week to 6.32%. This is the largest week-on-week increase since April.
Read more: Is this a good time to buy a house?
Goldman Sachs has revised its proposal predictions for the end of the year in early October for 30-year conforming mortgage rates, lowering them to 6% for this year and 6.05% for 2025, down from previous estimates of 6.5% and 6.1%.
The company’s strategists said in the note that there is “limited room” for big declines. They think that ‘the decline in mortgage rates has largely ended’.
Lovallo warned that it is highly likely that other homebuilders will miss net orders for the third quarter due to interest rate volatility this summer. More builders are gearing up to report quarterly earnings in the coming weeks, with PulteGroup (PHM) and NVR (NVR) reporting on October 22 and DR Horton (DHI) on October 29.
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
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