Interest Rate Shift and Its Consequences: America's Real Estate Developers in Focus

The demand for housing remains difficult to predict despite the decline in mortgage rates, as evidenced by the quarterly results of major U.S. developers. Reports from Lennar and KB Home, two of the largest construction companies in the U.S., reveal that new home orders in the third quarter fell short of Wall Street's expectations. These orders, considered an indicator of the residential real estate market, include the number of newly signed purchase contracts minus the orders canceled by buyers. Lennar, the country's second-largest developer, recently reported a 4.7% increase in net new orders to 20,587 in the quarter ending August 31. However, this figure was below analysts' forecast of 20,827, as reported by Bloomberg. Similarly, the quarter was disappointing for KB Home. The company announced that orders declined by 0.4% to 3,085—also below the expected 3,345, indicating that uncertainties regarding mortgage rates are having an impact. These rates fluctuated between 6% and 7% throughout the year, slightly exceeding the 7% mark in June. The market was weighed down by high volatility in interest rates, which, according to John Lovallo of UBS, made "June and July challenging." Uncertainty about the economic situation, the Federal Reserve's policy, and the upcoming elections led to investment restraint in the real estate market. Although the Federal Reserve significantly cut rates in September, how much further mortgage rates will decline remains unclear. Freddie Mac's data shows an increase of 20 basis points to 6.32% last week—the largest weekly rise since April. In October, Goldman Sachs revised its forecasts for conforming 30-year mortgage rates to 6% for the end of 2023 and 6.05% for 2025. Analysts warn of further disappointments in the upcoming quarterly reports from developers like PulteGroup and NVR on October 22 and DR Horton on October 29. Interest rate volatility could also affect their figures.