The quarterly earnings season for public builders kicks off this week with D.R. Horton, the largest company on the 2024 Builder 100, reporting the company’s fiscal third quarter results and runs through the first week of August.
The results and commentary from builders will offer a clearer picture of the housing market in light of recent mixed indicators. According to Investopedia, public home builder stocks jumped in recent weeks in response to a “cooler-than-expected” June inflation report and investor expectations that mortgage rates “will start to significantly downshift this year.” However, elevated rates for construction and development loans and still-elevated mortgage rates contributed to home builder sentiment in July dipping to its lowest level since December 2023, according to the latest Housing Market Index (HMI) from the NAHB and Wells Fargo.
Ahead of the first earnings report of the season, analysts from BTIG and Zacks Investment Research shared several areas to watch as public builders begin to report.
Earnings per Share and Input Costs
Builder earnings per share results will shed light on the realities of business conditions. BTIG carries elevated EPS expectations relative to Wall Street, in part due to the belief that many builders have been working to shrink land cost as a percent of cost of goods sold (COGS).
Zacks Investment Research will be watching whether builders continue their efforts of growing demand for entry-level homes and addressing the need for lower-priced homes. Public builder interest in M&A activity in the first half of the year also likely will result in improved volumes, revenues, and profitability, according to Zacks Investment Research.
Supply and Demand Balance
BTIG’s recent survey of private builders has indicated a “shaky stability” in the market between demand and supply. Private builders have noted demand is out there in the market, but that higher rates and prices are deterring buyers. Additionally, high construction costs are impacting profitability for private builders. Whether public builder sentiment and activity—including elevated incentives and price cuts—mirrors that of private peers will be something to watch as companies report in the coming weeks.
Expected Consumer Spending Slowdown
“We still see tension among investors expecting a broader consumer slowdown to impact housing demand regardless of builder price aggressiveness, so sentiment is cautious despite the likely interest-rate-driven 18% move in stocks in July (after a -14% move in 2Q),” Carl Reichardt, BTIG managing director and home building analyst, wrote in a research note previewing the earnings season.
Zacks Investment Research notes that the Fed’s recent decisions to hold interest rates steady despite previous suggestions of rate cuts is “less favorable for the rate-sensitive housing industry.”
BTIG notes that the expectations for the coming quarter are likely low, with a fear of a broader slowdown in consumer spending and a belief that lower rates would not have “an elastic impact on housing demand.” Builder commentary on the level of incentives and base price cuts necessary to prompt consumer activity will shed a light on demand elasticity, the resilience of demand, and consumer sentiment.
Impact of Weather
Weather events often result in construction delays for home builders for a variety of reasons, including wet ground conditions and utility issues related to power outages from storms. Hurricane Beryl, which impacted the Houston region in early July, caused more than $2.5 billion in wind damage and knocked out power for nearly 3 million customers, according to projections by CoreLogic. BTIG says the potential impact on public builders with a presence in Houston will be something to watch. The group projects, though, “fairly minimal construction delay impacts.” The unseasonably hot weather in several other major metros could also have a future impact on quarter traffic and sales.
