By Orbex
On Thursday, traders were a little surprised, if not disconcerted, following the third-quarter earnings report from Tri Pointe Homes. This is one of the US major home builders, and although they had relatively good overall earnings there were two points that were concerning.
- Average sales price -1%. This might not seem all that significant. However, in an industry that has so far been growing at twice the inflation rate, a drop in prices signifies a substantial loss of interest.
- Forward orders -30%. Compounding the prior assessment, a significant drop in people signing up to buy new homes could be evidence that the market is reaching its limits.
Of course, a single company’s report doesn’t necessarily imply an overall trend. But, it could be the canary in the coal mine.
Tri Pointe sells at the higher end of the market, with average sales prices of over $600K per home. So, if there were trouble in the housing market, we’d likely see it in the higher end first.
The underlying issue
Average mortgage rates in the US have been on the rise since September when the Fed announced that they would start their taper.
Analysts anticipate that the Fed is going to cut its purchase of mortgage-backed securities by $10B when they do start winding down their buying spree. The emergency monetary measures had pushed mortgage rates down to record lows last year.
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Average mortgage rates recently cracked above the 3.0% level. But they are still far from the 3.5-4.5% range that was normal before the pandemic. With soaring raw material costs home builders could be feeling the pinch as they try to pass on costs to customers.
Upcoming data
Tomorrow we get the release of new home sales data for the US, which could show a slowing of growth.
Throughout the summer, home sales numbers had been slowly increasing. Nevertheless, they were already below last year’s high levels when interest rates were significantly lower.
Economists are forecasting that there were 755K home sales during September, compared to 740K reported in August. That would be a slowing of the growth pace to a 1% monthly increase from a 1.5% increase prior.
The broader economic impact
The prices of homes are not factored into inflation calculations and don’t appear to be something on the Fed’s radar yet.
If the Fed pushes for higher interest rates in the near future though it could put a damper on house buying. Dividend payments are the largest component of American household spending, and many rely on home equity loans. Higher interest rates would restrict their potential spending pool.
Given how important the housing market is to the US economy, traders are likely to be paying close attention to this sector throughout the rest of the earnings season.
Maybe Tri Pointe’s results were just unusual, and other companies will have better results. DR Horton reports on November 9th. As the largest US homebuilder, their earnings report might be the key to understanding what’s going on in the market.
Article by Orbex
Orbex is a fully licensed broker that was established in 2011. Founded with a mission to serve its traders responsibly and provides traders with access to the world’s largest and most liquid financial markets. www.orbex.com
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