Low interest rates, flight to suburbs boost US builders

Homebuilders tipped to report a sharp rebound in Q2 as record-low mortgage rates and work-from-home changes spurred by the coronavirus encourage a shift to less crowded suburbs

by Reuters
Low interest rates, flight to suburbs boost US builders
 A new apartment building housing construction site is seen in Los Angeles, California in July 2018. Photo: Reuters.

US homebuilders are expected to report a sharp rebound in sales and orders for the second quarter as record-low mortgage rates and the working-from-home changes brought on by the coronavirus encourage more Americans to move to less crowded suburbs.

A quarter ago most homebuilders were pulling their annual forecasts and bracing for a huge fall in orders due to mounting cancellations in the face of historic US job losses that left buyers worried about their financial future.

Builders have been among the fastest recovering sectors from the initial round of lockdowns, however, with US housing starts up 17% in June as rock bottom interest rates got sales moving again.

A nationwide Harris poll also showed almost 40% of urban dwellers would now consider moving to less populated areas, and percentages browsing online for properties are even higher.

"Record-low rates and a powerful 'nesting' trend are driving strong order growth and pricing by the builders, this is now largely embedded in expectations," Evercore ISI analyst Stephen Kim said.

Refinitiv's consensus of analysts' estimates shows revenue for PulteGroup Inc, which kicks off the sector's earnings on Thursday, will rise by 9.5% from the preceding quarter. Its bigger rival, DR Horton is expected to see growth of 14%.

But luxury builder Toll Brothers Inc is projected to see only a marginal sales increase of 0.5%.

Barclays analyst Matthew Bouley last week raised earnings estimates and price targets for both Horton and Pulte, citing their exposure to affordable entry level homes, which are seeing strong demand from buyers.

Demand has also been supported by the 30-year fixed mortgage rate hovering around 2.98%, the lowest since 1971, according to data from mortgage finance agency Freddie Mac.

But with a staggering 32 million Americans unemployed, lumber prices at a two-year high, and rising coronavirus infections threatening to guarantee a long, deep recession, investors will also be looking for clarity on how long the current sales uptick can continue.

"Millennials (are) moving to the suburbs and people are looking for a better way to have a home office ... We're going to have to see how sustainable they are," Lennar Executive chairman Stuart Miller said last month.

Shares of homebuilders have risen quarter-to-date, fuelling a nearly 70% rise in the Dow Jones US Homes Index. The S&P 500 has risen about 26% in the same period.