By Kannaki Deka and Abhijith Ganapavaram
(Reuters) - U.S. homebuilders will likely find it harder to raise home prices in the coming months as rising mortgage rates and inflation cut into demand, industry analysts said, potentially threatening a breakneck pace of profit growth.
D.R. Horton Inc, Lennar Corp (NYSE:LEN), PulteGroup Inc (NYSE:PHM) and other homebuilders are headed for a strong earnings season, but the U.S. housing boom is showing signs of a cooldown as sky-high inflation sets the U.S. Federal Reserve on course for aggressive rate hikes.
The rate for the 30-year fixed mortgage, the most popular U.S. home loan, climbed above 5% for the first time in more than a decade, making homes less affordable, especially for lower-income groups and first-time home buyers.
"First-time home buyers are getting a double or even triple whammy right now," said Ralph McLaughlin, chief economist at real estate data firm Kukun, adding that the rate of price growth should "absolutely cool right now".
Home prices have skyrocketed since the pandemic as buyers opted for bigger homes in the suburbs, encouraged by low mortgage rates and a shift to work-from-home. Median existing house prices jumped 15% from a year earlier to an all-time high of $375,300 in March.
THE CONTEXT
Over the past year, D.R. Horton, Lennar and PulteGroup have reported robust profits as strong demand allowed them to charge higher prices.
GRAPHIC: U.S. Homebuilders' net income - https://graphics.reuters.com/USA-HOMEBUILDERS/RESULTS/lgpdwgnnlvo/chart.png
In the coming round of earnings, however, the focus will be on how these companies plan to navigate a potential drop in demand and higher costs of construction due to rising inflation.
U.S. home sales dropped to the lowest level in nearly two years in March. The share of adults planning a home purchase within a year also fell to the weakest since mid-2020, according to a report by the National Association of Home Builders.
"We expect price increases to slow and buyers in bidding wars to face fewer competing offers," Redfin (NASDAQ:RDFN) Chief Economist Daryl Fairweather said in a report.
GRAPHIC: Homebuilders' stock performance - https://graphics.reuters.com/USA-HOMEBUILDERS/RESULTS%20USA-HOMEBUILDERS/gdvzyaddopw/Homebuilders%20stock%20performance.PNG
FUNDAMENTALS
* Analysts estimate D.R. Horton's Q2 revenue to grow 18% to $7.62 billion when it reports results on April 26
* Earnings per share is estimated at $3.37
* The stock has lost about 34% of its value this year
* For Lennar, analysts estimate Q2 revenue to grow 36.9% to $8.16 billion
* Earnings per share is estimated at $3.95
* The stock has lost about 33% of its value this year
* PulteGroup's Q1 revenue is expected to grow 12.6% to $3.07 billion
* Earnings per share is estimated at $1.71
* The stock has lost about 37% of its value this year
WALL STREET SENTIMENT
* For DHI, 15 out of 21 analysts rate the stock "buy" or higher, while 6 have a "hold" rating
* The median price target is $115
* For LEN, 14 out of 20 analysts rate the stock "buy" or higher, while 5 have a "hold" rating and one "sell" rating
* The median price target is $121.5
* For PHM, 10 out of 18 analysts rate the stock "buy" or higher, while 8 have a "hold" rating
* The median price target is $65.5