Record low mortgage rates have done little to kick-start the housing market. Now, the Mortgage Bankers Association says in a mortgage rates forecast that mortgage rates will start to tick back up through 2011, putting even more pressure on the real estate market, and, by extension, the country’s homebuilders.
Earnings estimates for homebuilders are already weak. Pulte Group (NYSE: PHM) is expected to report an EPS loss of 4 cents a share when it reports third-quarter earnings next week. Lennar (NYSE: LEN) reported an EPS gain of 6 cents a share for its third quarter, but that is expected to fall to a gain of 2 cents a share in the fourth quarter and to a loss in the first quarter of 2011. KB Home (NYSE: KBH) reported a loss in its third quarter and a similar loss is expected in the fourth quarter. DR Horton (NYSE: DHI) is expected to swing to a loss of 4 cents a share in its third quarter and do no better than break even for the fourth. Toll Brothers (NYSE: TOL) posted a loss in its third quarter and another is expected in the fourth. Hovnanian Enterprises (NYSE: HOV) and Beazer Homes USA (NYSE: BZH) are also on track to match or exceed previous losses.
It’s difficult to estimate exactly what effect the rising mortgage rates will have. The mortgage bankers expect 30-year fixed rates to fall to 4.4% in the fourth quarter and rise slowly to 5.1% by the end of 2011. But of 248,000 new mortgages expected in the fourth quarter of 2010, just 92,000 are expected to be new purchases. The rest are refinancings. And of those new purchases, existing homes are expected to outsell new homes.
The bankers forecast new home sales at a seasonally adjusted annual rate of 318,000 in the fourth quarter. That number does grow to a rate of 436,000 by the fourth quarter of 2011. But the bankers have also produced an economic forecast that predicts unemployment will stay at 9.8% in the fourth quarter of 2010, rise to 9.9% in the first two quarters of 2011, fall to 9.8% in the third quarter, and settle at 9.5% for the fourth quarter of next year.
Somehow those unemployment estimates don’t square with a projected rise in home sales. And, contrary to many other estimates, the bankers predict that U.S. GDP growth will rise from 1.9% in the fourth quarter of 2010 to 2.4% by the end of 2011. In August, Goldman Sachs forecast 2011 GDP growth at 1.9%, down from its previous estimate of 2.4%.
Even in the best case, homebuilders will continue to struggle. Rising mortgage rates, even though still near historical lows, will reduce enthusiasm among potential buyers, and with so many existing homes on the market already, new homes could be an even tougher sale requiring costly incentives that will pressure profits even more.
