PulteGroup Inc. reported plunging demand for its homes and a spike in canceled deals for the third quarter. The shares rose, showing just how the bar has been “lowered” for builders navigating the U.S. housing slump.
Contracts were canceled in 24% of deals in the period, up from 15% in the second quarter, the Atlanta-based builder said in a statement Tuesday. Purchase contracts fell 28% from a year earlier to 4,924, missing the average estimate of 5,715 from analysts surveyed by Bloomberg.
The shares were up 3.9% to $39.45 at 10:20 a.m. in New York.
“It’s likely that the 28% decline in orders was better than feared, given the massive order declines we saw” recently from competitors, such as KB Home and Toll Brothers Inc., Bloomberg Intelligence analyst Drew Reading said. “Still, better than feared does not mean good, and we expect current challenging market conditions to persist for the foreseeable future.”
PulteGroup’s results reflect a slide in housing demand as mortgage rates rise to the highest levels since 2002, creating an affordability crunch that’s the worst in decades. The slowdown is more severe in western states, especially California, where buyers were already struggling to afford prices before borrowing costs surged.
In the West, PulteGroup’s net new orders slumped nearly 62% in the third quarter from a year earlier, while orders in the Midwest were down almost 40%.
“Demand clearly slowed in the period as dramatically higher interest rates created financial and psychological hurdles for potential homebuyers,” Ryan Marshall, PulteGroup’s president and chief executive officer, said in the statement.
The affordability challenges, in light of 30-year mortgage rates approaching 7%, “are well understood at this point, which has likely lowered the bar for builders in the 3Q earnings season,” Reading said.
While the slump in orders fell below estimates, it was manageable, Barclays Plc analysts said. The company also reported “healthy” gross margin results.
Still, “the forward-looking tone in the release was much more cautious,” the analysts wrote.
Homebuilders including PulteGroup are trying to pivot as the market goes from red-hot to rapidly cooling. On a conference call with analysts, the company said it’s increasing buyer incentives and shifting from mortgage rate buy-downs to price cuts.
PulteGroup also said it was adjusting starts to better match the slowing pace of sales. The company also walked away from some land deals that didn’t meet certain metrics as the market changed, writing off $24 million of deposits and expenses tied to the transactions.
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