Don't expect a 'tidal wave' of homes to hit the market as rates decline, PulteGroup CEO says
The expected decline in mortgage rates this year is unlikely to push a significant number of US homeowners to sell their houses despite the cheaper cost of borrowing, according to one homebuilder.
Ryan Marshall, CEO of PulteGroup (PHM), said on the company's fourth quarter earnings call Tuesday that he doesn’t expect rate cuts from the Federal Reserve to “unleash a tidal wave of resale inventory” — which would potentially heat up builders' competition.
Over the past year, homebuilders have benefited from a lack of inventory of existing homes as high rates kept both buyers and sellers on the sidelines. The SPDR S&P Homebuilders ETF (XHB) has gained about 40% in the past 12 months.
Read more: 5 strategies to get the lowest mortgage rates in 2024
The Federal Reserve has signaled three interest rate cuts this year as inflation eases. The central bank is scheduled to issue its next monetary policy decision on Wednesday.
"So is it better than where we're at today? Certainly," Marshall said of the expected rate cuts. "Will that start to free up some resale inventory? I think so. And I think that's probably helpful against the backdrop of we continue to be undersupplied in the country. So on balance, I don't think it has much impact at all on what we're projecting for our business in 2024."
In the fourth quarter, PulteGroup reported closings of 7,615 homes, down 14% year over year and below analysts expectations of 8,026 homes, as mortgage rates peaked in October. But in a positive sign, net new orders in the fourth quarter increased 57% over the prior year to 6,214 homes.
Marshall said earlier on the call that "it remains our view that the long-term outlook for new home construction is extremely positive."
He noted that "a structural shortage of housing caused by years underbuilding has only been exacerbated by a lack of resale inventory as the owners are financially and/or emotionally locked into their low-rate mortgages."
Indeed, while mortgage rates are projected to come down to around 6% this year, that's still a far cry from the 3% to 4% rates buyers enjoyed earlier in the pandemic.
National Association of Home Builders CEO Jim Tobin told Yahoo Finance in an interview last week that "the world is getting ready to realize that we're no longer going to go back to those 3% to 4% mortgage rates. And there does need to be a generational shift here that mortgage rates in the 5% for the long term are still really good low rates for a long-term investment like your home."
As rates soften, it has sparked a debate over whether homebuilders should pull back on incentives, such as mortgage rate buydowns, where the builder effectively lowers the rate on the loan by paying a portion of the costs. PulteGroup isn’t changing its strategy on this front.
“The reason we've assumed that the incentive load stays about where it is [is] just because affordability continues to be challenged,” Marshall said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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