Shaina Mishkin

Mortgage rates haven't been kind in recent months to home buyers -- or builders. D.R. Horton's earnings guidance could provide a more positive outlook for the sector, a team of analysts say.

The nation's largest public home builder is set to release its first-quarter earnings on Tuesday before the market opens. Analysts polled by FactSet estimate the company earned $2.35 a share on about $7.01 billion in revenue, compared with $2.82 a share on about $7.7 billion in revenue in the year ago quarter. Analysts expect 17,779 homes were delivered to buyers, and 18,389 new orders were registered.

Of particular focus will be Horton's margin on home sales. Gone are the days of easy demand from buyers, which translated into home sales gross margins as high as 30%. The company is expected to report a gross margin on home sales of 22.6%, according to FactSet.

But Horton's outlook and expectations for the typically busy spring homebuying season could be of greater consequence for builder stocks. "While we don't think the fundamental backdrop for housing is great, it's also not apocalyptic like some investors think," Oppenheimer analysts Tyler Batory and Jonathan Jenkins wrote last week.

The team, which has a Perform rating on Horton's shares with no price target, says the builder could offer better second quarter guidance than anticipated. One reason for the more upbeat outlook: Horton's inventory levels have been "appropriately managed to prepare for the spring season."

A better-than-expected outlook could ease some investors' worries about builders as mortgage rates remain high. The rate on a fixed 30-year home loan topped 7% for the first time since May 2024 last week, according to Freddie Mac.

That gain is felt quickly by home construction companies. "Builders report cancellations are climbing as a direct result of mortgage rates rising back up near 7%," Robert Dietz, the National Association of Home Builders' chief economist, said in a statement last week.

To keep sales moving when mortgage rates are volatile or rising, many builders offer incentives, like mortgage rate buy-downs, which can lower a buyer's monthly payment but weigh on a builder's margin. In January, 61% of builders surveyed by the trade group said they had some sort of incentive, in line with a range that has fluctuated between 60% and 64% since the summer. Since lower mortgage rates means builders have to spend less on incentives, the stocks tend to perform well when the 10-year Treasury yield falls, and perform poorly when the yield rises.

Rising mortgage rates and more hawkish expectations around Federal Reserve rate cuts and inflation hit builders hard in December. The iShares iShares U.S. Home Construction exchange-traded fund fell 16.5% in December as the 10-year Treasury yield, a benchmark for mortgage rates, climbed. The fund rose in January as economic data reined in the 10-year yield, but remained more than 15% below its record closing high in October, according to Dow Jones Market Data.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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January 20, 2025 16:30 ET (21:30 GMT)

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