Bad for ↓
US mortgage rates rose for a seventh straight week to 7.49%, the highest in nearly three years. Homebuilders like D.R. Horton and Lennar feel it first through weaker buyer demand. The title insurers First American Financial and Fidelity National Financial are also exposed, because they earn a fee on every home sale and refinance.
Source: Bloomberg ↗
Bloomberg reported that US mortgage rates reached 7.49% after seven straight weekly rises. That is the Mortgage Bankers Association's contract rate for the week ended October 2. It rose 19 basis points (0.19 percentage points) and is the highest in almost three years. Rates are following long-term Treasury yields higher. The 10-year yield was 5.31% on October 5. Homebuilders such as D.R. Horton (DHI) and Lennar (LEN) feel it first. They often pay to lower buyers' rates, which squeezes their margins. The effect reaches further. Every home purchase and every refinance needs a title insurance policy, which protects the buyer and lender against ownership disputes. First American Financial (FAF) and Fidelity National Financial (FNF) earn those premiums per deal. When higher rates cut purchases and refinances, they write fewer policies. Their revenue was $2.1 billion and $4.0 billion in the quarter to June 30. Both report title results separately; how big the drop will be is not yet known. MBA said purchase applications were 15% below a year earlier, and refinance demand was at its lowest in a long time.
Housing shares swung sharply in early October. Lennar fell 6.7% on October 5 and rose 4.0% on October 6, though much of Lennar's swing was company-specific: a short report from Hunterbrook on October 2 alleged it sold hundreds of homes to its spinoff Millrose to hit targets, and on October 6 Berkshire Hathaway was reported to have raised its stake to nearly 12%. Most other builders also bounced on October 6. Fidelity National Financial fell 5.1% over the five trading days to October 6, and First American fell 2.7%. Fidelity National's fall includes a 6.1% drop on September 30, before the latest rate data.
The link weakens if rates quickly reverse. Freddie Mac's weekly survey is a separate measure, and it showed 7.28% for the week of October 1, so it also shows rates rising. A fall in that survey back toward 7% over the next few weeks would ease the pressure. Another sign would be First American and Fidelity National reporting steady or rising title order counts in their results for the quarter ending September 30.
Both title insurers grew revenue in the quarter to June 30, by 15% at First American and 11% at Fidelity National, even with rates already high. That suggests other parts of their business may cushion a slowdown in home deals. Fidelity National also holds a majority stake in the publicly traded F&G annuity business (NYSE: FG), which tends to benefit from higher long-term yields, so the net effect on it is less clear than for First American.
In late 2023, when mortgage rates last neared 8%, builders leaned on rate buydowns to keep selling.
Mortgage rates rise to 7.49%, which lowers what buyers can afford and pushes homebuilders to spend more on rate buydowns or sell fewer homes.
Fewer home purchases and fewer refinancings reduce the number of property deals that close.
Title insurers like First American Financial and Fidelity National Financial write fewer policies, because each premium is tied to a closed deal.
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