Bad for ↓
Home sellers are starting to cut asking prices, a sign of weaker demand. Homebuilders such as D.R. Horton and Lennar feel it first through thinner margins. If builders then start fewer homes, their supplier Builders FirstSource could sell less.
Source: WSJ ↗
The Wall Street Journal reported on October 11 that home sellers are beginning to cut asking prices. It names Lennar and KB Home as builders likely to offer bigger incentives. Resale homes compete directly with new ones. Builders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM) and NVR (NVR) may need bigger discounts to keep sales moving, which squeezes their margins. Lennar's earnings had already roughly halved: it reported $1.19 a share for the quarter ended August 31, down from $2.29 a year earlier. Mortgage rates averaged 7.40% in the week to October 8, which keeps buyers stretched. The effect travels further. A builder that earns less on each home has reason to start fewer homes. Fewer starts leads to fewer orders for lumber and building products from Builders FirstSource (BLDR). Its revenue was already down 9% from a year earlier, at $3.9 billion, in the quarter ended June 30. How much more it could lose is not yet known.
Builder and supplier shares were already sliding before the report. In the five trading days to October 9, Builders FirstSource fell 6.0%, Lennar 3.9% and PulteGroup 3.1%. D.R. Horton was nearly flat, down 0.1%.
Builders may keep building at the same pace and absorb thinner margins rather than cut starts. Then supplier volumes would hold. The clearest sign would come on October 29, when Builders FirstSource reports July to September results. Analysts already expect revenue of about $3.77 billion, so results at or above that, and no cut to its outlook, would weaken the link. A clear drop in weekly mortgage rates from 7.40% over the coming weeks would also ease the pressure.
Builders FirstSource's revenue had already fallen 9% in the June quarter, and its shares fell 6.0% in the five trading days to October 9. Builders' margin squeeze was also visible before the report: Lennar's earnings fell roughly 48% in the quarter to August 31. The price cuts are therefore an added signal rather than a new shock. They could also be local rather than national, leaving overall construction little changed. Lennar has said it is keeping its sales pace rather than cutting volume, which works against the step from thinner margins to fewer starts.
Resale sellers cut asking prices, so homebuilders must offer bigger incentives to compete, which squeezes their margins.
Builders earning less per home have reason to slow how many new homes they start.
Fewer starts lead to fewer orders for lumber and trusses from Builders FirstSource.
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