MW Mortgage rates are falling, but it's not helping sell more homes. Are lower house prices next?

By Tomi Kilgore

Homebuilder stocks are in a bear market, as lower mortgage rates and continued rate discounts haven't improved demand

The housing market is changing, and becoming a buyer's market. Sellers haven't quite accepted that yet.

Real estate agents will often argue that the reason home prices are so high, is because there isn't enough supply to meet demand. But if you ask a homebuilder, they might say the opposite, that they have too much new inventory and the tricks they've used to entice reluctant buyers are no longer working.

Chief Executive Paul Romanowski of D.R. Horton Inc. $(DHI)$, the S&P 500's SPX largest homebuilder by market capitalization, effectively explained the dichotomy. He said during the company's recent earnings call, according to an AlphaSense transcript, that while inventories for both new and existing homes have increased, "the supply of homes at affordable price points is generally still limited."

Basically, sellers have to make the homes more affordable to sell them. And since mortgage-rate discounts aren't fueling the same demand that they used to, some builders have already turned to their last resort to move unsold homes, which is lowering prices.

Wall Street appears to have recognized the problem, as the boom in homebuilding stocks is fading fast.

The iShares U.S. Home Construction ETF ITB has fallen to around seven-month lows, and is trading about 24% below its record close reached in mid-October, which many on Wall Street would say puts the ETF in a bear market.

And looking at a 3-year logarithmic chart, which are often used by chart watchers to better relate changes in price over longer periods of time and after big price moves, the ETF broke below a two-year uptrend line in mid-December. That breakdown was confirmed when a subsequent attempt to re-establish that trend failed.

The decline in homebuilder stocks is the tipoff that trouble is brewing in the housing market.

A big reason for the decline is the recent weak industry data, including a big drop in sales of newly built homes, falling homebuilder confidence, and pending home sales - deals under contract but not yet closed - at record lows.

Read: The brightest spot of the housing market is fading fast.

What's worrying for builders is that this weak data is coming even as the rate on a 30-year fixed mortgage has fallen for the sixth week in a row, to 6.76% as of Feb. 27.

Even with the lower rates, real-estate services company Redfin Corp. (RDFN) said that based on current selling rates, there was five months of housing supply on the market during the four weeks to Feb. 16, which is the most in five years, and up from 4.1 months a year ago.

The typical home sold took 57 days to go under contract, the longest since the start of the COVID pandemic in March 2020, Redfin said.Basically, sellers are still asking too much for their homes.

"Sellers are acting like it's a seller's market, but it's not," Redfin Chief Economist Daryl Fairweather told MarketWatch. "It's getting closer to being a buyer's market."

"Our biggest concern for the sector at this juncture is that the recent drop in mortgage rates does not appear to have driven demand improvement," wrote Oppenheimer analyst Tyler Batory in a recent note to clients.

And the current environment doesn't change, Batory believes the shares of the four largest homebuilders - D.R. Horton, Lennar Corp. $(LEN)$, PulteGroup Inc. $(PHM)$ and Toll Brothers Inc. $(TOL)$ - could have nearly 30% further downside on average.

Builders have been offering relatively high incentives, such as discounted mortgage rates and rate buydowns, in an effort to spark demand.

The national average of homebuilder incentives on unsold inventory of homes was 7% during the fourth quarter - meaning the actual price offered was discounted 7% - ranging from 10% in Florida and Texas down to 3% in the Northeast, according to data provided by Rick Palacios, director of research at John Burns Research & Consulting.

"During normal times, you'd see incentives run 4% to 5% of the sales price," Palacios said.

The problem is the historically high incentives are no longer working.

Chief Executive Alan Merrill of builder Beazer Homes USA Inc. $(BZH)$ offered an explanation as to why the incentives have stopped working. He said if a potential buyer saw an incentive rate they liked for a home they didn't want, they'll as for the same incentive rate for a home they do want.

"Everybody we see says, 'Gosh, that would be a great rate.' Well, there's no path necessarily for every home to that rate," Merrill said, according to an AlphaSense transcript of a Jan. 30 earnings call. "And so, what do those buyers do? They hold out."

The next lever to pull is price cuts, but as John Burns' Palacios said, builders are always hesitant to adjust prices lower, because that would reset the price comparisons of other homes sold in the area, and also lower the value of homes currently being built.

But as Oppenheimer's Batory argued, they may no longer have a choice.

"Our concern is builders may have used up some of the excitement created by offering a lower mortgage rate, suggesting price reductions or higher sales commissions could be next," Batory wrote.

Whether through higher incentives, lower prices or higher commissions paid to real-estate agents to sell their inventory, homebuilder margins - how much is made on each home sold - look set to suffer. And Wall Street won't like it.

Some, like PulteGroup Chief Executive Ryan Marshall, figure if that's the case, so be it.

"We will not be margin proud and will find pricing to make sure our standing inventory moves," Marshall said.

Aarthi Swaminathan contributed.

-Tomi Kilgore

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March 01, 2025 10:38 ET (15:38 GMT)

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