Between Interest Rate Noise and Order Slowdowns: America's Homebuilders Struggle with Forecasts

The demand for residential real estate remains difficult to predict even with falling mortgage rates. The current earnings season vividly demonstrates how this affects the results of major U.S. homebuilders. Two of the most significant construction companies, Lennar and KB Home, reported lower net orders for new homes in the third quarter than Wall Street had anticipated. These net orders, which are the number of new signed sales contracts minus canceled orders, are considered an important indicator of construction activity and are particularly closely monitored by analysts and investors. Lennar, the second-largest homebuilder in the U.S., reported a 4.7% increase in net orders to 20,587 compared to the previous year. However, this figure fell short of analysts' estimates, which according to Bloomberg, were at 20,827. KB Home also disappointed with a 0.4% decline in orders to 3,085, which also fell short of expectations of 3,345. The variable level of mortgage rates, which fluctuated between 6% and 7% this year, further complicated forecasts. In June, rates hovered just above or below the 7% mark. According to UBS analyst John Lovallo, the summer months of June and July were particularly challenging in modeling demand. Buyers hesitated in light of uncertain interest rate prospects and growing economic uncertainties, including the upcoming presidential election. Despite a large-scale interest rate cut by the Federal Reserve in September, uncertainty persists. Current data from Freddie Mac shows a significant increase in the average 30-year fixed rate by 20 basis points to 6.32%—the strongest weekly increase since April. Goldman Sachs recently revised its year-end interest rate forecasts, lowering them to 6% for 2023 and 6.05% for 2025. However, experts see limited room for further declines. Lovallo predicts that other homebuilders will also struggle with lower order numbers in the third quarter due to volatile interest rate developments. Companies like PulteGroup, NVR, and DR Horton are set to release their quarterly reports in the coming weeks.