Prospective home buyers are getting hit by a double whammy of bad news. Prices remain prohibitively high for many consumers, largely due to low supply. Mortgage rates have also skyrocketed to their highest level in 14 years.
That is weighing on demand for both new home construction as well as sales of existing homes on the market. Home builders Lennar (LEN) and KB Home (KBH) both reported their latest quarterly results Wednesday afternoon. The two companies each posted a profit that topped analysts’ forecasts, but revenue was below Wall Street’s expectations.
“Sales have clearly been impacted by rising interest rates,” Stuart Miller, Lennar’s executive chairman, said in the company’s earnings release. Miller added that “there remains a significant national shortage of housing, especially workforce housing, and demand remains strong.”
Lennar also reported that orders for new homes fell 12% from a year ago and that it is trying to “navigate the rebalance between price and interest rates.”
Mortgage rates are likely to head even higher given the Federal Reserve’s series of big interest rate increases and likely plans for even more hikes in the coming months.
KB Home chairman and CEO Jeffrey Mezger said in Wednesday’s earnings report that “the combination of rising mortgage interest rates, ongoing inflation and other macro concerns has caused many prospective buyers to pause on their homebuying decision.”
Shares of KB Home fell 5% Thursday following its earnings report. Lennar rose 2%. But both stocks have plunged this year along with other builders. Lennar’s stock is down 32% in 2022 while KB Home’s shares have plummeted 40%.
The SPDR S&P Homebuilders ETF (XHB), which owns these two stocks and shares of other housing related companies such as air conditioner maker Carrier and retailers Home Depot (HD) and Lowe’s (LOW), is down 35% this year.