Real estate

DR Horton sees deals fail as mortgage rates rise

  • The nation’s largest homebuilder said 24% of its contracts failed in its most recent quarter.
  • Homebuyers retreated amid rising mortgage rates and market uncertainty.
  • To counter the slowdown, homebuilders are offering more incentives and reducing production.

A growing number of potential buyers are foregoing offers for newly built homes as they face higher mortgage rates and an uncertain future for the housing market.

Today, homebuilders are reducing the number of homes they build and offering more incentives to keep sales moving.

DR Horton, the nation’s largest automaker by production volume, is no exception.

Nearly a quarter of DR Horton’s contracts failed in the three months to June, the company said Thursday in its third-quarter earnings call. The cancellation rate of 24% was up about 7 percentage points from the previous year.

DR Horton executives maintained a generally positive outlook despite the wave of cancellations, as they said housing supply is still low and demand, though diminished, remains strong. The company attributed the increase to deteriorating consumer confidence as economic difficulties reduced buyer confidence in the housing market.

The Federal Reserve’s efforts to bring the economy back into balance raised mortgage rates and pushed the price away from many potential buyers, which weighed on housing demand. According to Freddie Mac, the average US fixed rate for a 30-year mortgage was 5.54% this week. This rate represents a notable increase from the pandemic low of 2.68% in December 2020. As rates rise, buyers of a median-priced home are now looking at monthly mortgage payments more than $400 higher than those from barely a year ago.

Although homebuilders are still a long way from pressing the panic button, DR Horton’s latest quarterly results show how big homebuilders are being forced to adapt to a changing market by reducing their volumes of production, moderating their price increases and offering more incentives to buyers.

DR Horton ended its third quarter with 56,400 homes in inventory, up 19% from a year ago. David Auld, the company’s president and chief executive, attributed much of the slowdown to “payment shock” from homebuyers.

“Around mid-June, we got a 100 basis point increase in long-term rates over a period of about three or four days,” Auld said on the earnings call. “I think that had an impact on the cancellations.”

Indeed, the national churn rate among homebuilders reached 14.5% in June, according to the results of a investigation conducted by John Burns Real Estate Consulting. This is the highest rate since April 2020, when the COVID pandemic initially crippled the housing market.