Following the Fed’s recent quarter-point rate cut and an earlier 50 basis-point reduction in September, the real estate market is adapting to shifting conditions, leaving homebuilders to navigate a mixed landscape. While resale homes are struggling, new-home sales are the part of the housing market that is moving particularly as mortgage rates fell substantially in September. Sales of newly built homes in the U.S. surged to the highest level in 17 months as lower mortgage rates brought home buyers back into the market.
Sales of newly built homes in the U.S. rose 4.1% to an annual rate of 738,000 in September, from a revised 709,000 in the prior month, the Commerce Department reported Thursday. The pace of sales was at the highest level since May 2023.
U.S. existing home sales dropped to a 14-year low in September, driven by sticky mortgage rates that have remained elevated for an extended period and persistently high home prices, signaling continued challenges for the residential market.
Climbing Mortgage Rates
Mortgage rates are tied to 10-year Treasurys which have increased about 60 basis points since early September. The yield dipped below 3.6% in mid-September but has since surged past 4.2%, marking its highest level in several months. This rise is driven by economic factors like strong U.S. economic data, including better-than-expected job growth and persistent inflation concerns. The rate on 30-year fixed mortgages averaged 6.90% last week, a jump up from the 6.08% at the end of September, according to Freddie Mac, adding pressure for the sector. While mortgage rates are still elevated, they are in a better place than one year ago, when the 30-year fixed was well over 7%.
The National Association of Home Builders (NAHB) Chief Economist Robert Dietz noted, “We are forecasting uneven declines for mortgage interest rates in the coming quarters, which will improve housing demand but place stress on building lot supplies due to tight lending conditions for development and construction loans.”
Silver Linings in a Varied Market
There are quite a few bright spots, to be sure. The NAHB is forecasting that by the second quarter of 2025, the market will experience a prolonged period of sub-6% mortgage rates. (Previously, the NAHB forecasted this to happen in the fourth quarter of 2025).
The construction sector saw multifamily apartment completions rise 42% year over year, while the number of units under construction declined by 16.8%. There were 1 million single-family homes starts in September—5.5% year-over-year increase and 2.7% above August’s numbers.
Amid this positive news, U.S. homebuilder sentiment rose for the second consecutive month in October, reaching a four-month high. The outlook for 2025 is optimistic, with many expecting a strong spring season. KB Home Chief Financial Officer Jeff Kaminski cited the lower rate environment and consumers’ growing adaptation to elevated rates over the past few years as factors behind the forecast for a ‘pretty strong spring selling season given the right conditions,’ during an earnings call last month.
Q3 Homebuilder Performance Roundup Highlights Strategies to Mitigate Risk
PulteGroup reported mixed earnings results in the third quarter, with its gross margin on home sales slightly missing expectations at 28.8%. The company emphasized that competitive market conditions required an increase in sales incentives. Looking ahead, PulteGroup projects a lower margin in the fourth quarter, ranging from 27.5% to 27.8%. “Between rate volatility, the impact of hurricanes, and the upcoming presidential election, I think the upcoming spring selling season will offer the best assessment of fundamental housing demand,” said Ryan Marshall, President and Chief Executive Officer during the October 22nd earnings call.
As far as underwriting new deals, PulteGroup is migrating toward controlling more land via option lots—land parcels that homebuilders have secured the option to purchase or develop at a later time, but they have not yet fully acquired. According to Marshall this will be a multi-year effort with a long-term goal of getting to 70% option lots to enhance returns and mitigate market risk. The firm’s five-year land acquisition and development spend is expected to total more than $20 billion.
KB Home, meanwhile, posted 10% year-over-year revenue growth in the third quarter, driven by an 11% rise in homebuilding revenue. However, the company acknowledged the near-term pressure from high mortgage rates impacted demand. KB Home began to reduce the dollar amount of mortgage concessions on their net orders in August in conjunction with the lower prices, according to Robert McGibney, President and COO. KB Home expects single-digit growth through 2024 and 2025, buoyed by long-term housing fundamentals despite current rate challenges.
The homebuilder reported that it started nearly 3,000 homes in the quarter, ending the quarter with over 7,700 homes in production, including models.
There was mention of a significant focus on certain regions, particularly Southern California, where demand remains strong. The company also highlighted certain markets in Texas and Florida that have seen resale inventories improve creating more pressure for new home sales. The builder lowered prices in some of those markets to spur on sales pace, which it said bounced back in August.
KB Home reported that 42% of their lots were under option contracts, with the remaining 58% owned. This reflects a shift from the previous year, when approximately 27% of lots were under contract. This increase in option lot percentage is part of KB Home’s strategy to manage land acquisition costs while maintaining flexibility in a dynamic housing market
Lennar also reported strong third-quarter results, with revenue growing 9% year over year, although margins were below analyst expectations. The company’s executives expressed optimism about an improving environment for homebuyers as mortgage rates continue to decline, falling to 6.1% from last year’s highs of nearly 8%. Lennar believes that falling rates will eventually lead more buyers back into the market, particularly those looking to upgrade their homes or enter homeownership for the first time. Stuart A. Miller, Executive Chair and Co-Chief Executive Officer, said during the earnings call in September, “While strong demand, enabled by incentives and mortgage rate buydowns, has driven the new home market over the past two years, we fully expect an even stronger and more broad-based demand cycle as rates move lower. While demand has been and should remain strong, the supply of homes remains constrained.”
At quarter end, Lennar owned 87,000 home sites and controlled 369,000 home sites for a total of 456,000 home sites, according to the earnings call report.
Mixed Near-Term Outlook
Homebuilders face a complex environment, navigating market headwinds while leveraging creative solutions to maintain momentum. As mortgage rates remain elevated, builders are adapting with option strategies, price adjustments, and incentives for home buyers, to stabilize demand and prepare for better times ahead. But as mortgage rates fall over the coming months, new home sales will be competing with existing home inventory as many homeowners have held pat until rates are more attractive. While challenges persist, the homebuilder segment remains optimistic about the future, with long-term demand and supply imbalances likely to support growth once economic conditions improve.
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