Bad for ↓
Contracts to buy US homes fell to a record low in September as mortgage rates topped 7%. Homebuilders lose orders and start fewer houses, which hurts building-materials supplier Builders FirstSource.
Source: MarketWatch ↗
When home buyers stop signing contracts, the pain spreads past builders to the companies that sell them wood and other building materials.
The National Association of Realtors' pending home sales index, which counts contracts on existing homes, not new builds, fell 7.3% in September to 66.0. That is the lowest reading in its history and 11.3% below a year earlier. Its chief economist, Lawrence Yun, blamed fast-rising mortgage rates. Freddie Mac's 30-year rate was 7.40% on October 15. Homebuilders such as D.R. Horton (DHI), PulteGroup (PHM) and NVR (NVR) take the direct hit. The Commerce Department reported the same day that single-family starts fell 4.6% in September to an annual rate of 859,000 and single-family permits fell 4.0% to 845,000, the lowest since March 2023. The effect then travels to the builders' suppliers. Builders FirstSource (BLDR) sells building materials to builders, so fewer starts mean fewer deliveries. Its sales were already down 9% on a year earlier in the quarter to June 30, at $3.9 billion. In July it cut its 2026 sales forecast to $14.0 billion-$14.8 billion, with single-family the main drag. How much further it could fall is not yet known.
On October 19, the day before the pending sales report, Builders FirstSource fell 3.1%, D.R. Horton 2.9% and PulteGroup 2.3%, after the NAHB said builder sentiment fell to 29 in October, its lowest since June 2012. Over the five trading days to October 19, Builders FirstSource was still up 1.6%.
Why that may be wrong
Investors sold builders and Builders FirstSource on October 19 after a weak builder-sentiment survey, before the pending sales and housing starts reports came out on October 20. The record low in contracts suggests weaker builder activity could continue past the September data, though its sales were already falling before this report.
Mortgage rates could ease quickly and bring buyers back. Long-term Treasury yields, not the Fed, are pushing mortgages up, with the 10-year yield at 5.15% on October 19. One sign would be Freddie Mac's weekly rate falling back below 7% in the coming weeks, followed by a rebound in October pending sales. A second would be Builders FirstSource's next quarterly results, due October 29, showing sales stabilizing rather than falling further.
Builders FirstSource's sales were already falling, so part of the slowdown may already show in its numbers.
When mortgage rates rose from about 3% to about 7% in 2022 and 2023, existing home sales fell to roughly 4 million a year, a multi-decade low. Homebuilders and mortgage lenders saw weaker volumes, and builders relied on rate buydowns and other incentives to hold sales.
Signing a contract is the first step in buying a home, and in September fewer Americans signed than ever recorded. Mortgage rates above 7% make the monthly payment too big for many buyers, so they wait.
Builders watch buyer demand closely. When fewer buyers sign, builders start fewer new houses. The Commerce Department reported that single-family permits fell 4.0% in September to 845,000, the lowest since March 2023. Fewer starts mean fewer orders for the materials that go into each house.
Builders FirstSource supplies those materials, so its deliveries shrink along with starts.
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