8% mortgage rates didn't crush U.S. homebuilders

Despite the challenges of spiked mortgage rates, reaching over 8.0% this fall, major U.S. homebuilders not only continue to sell homes but also report robust earnings.

How are builders doing it?

First, resale inventory remained tight in 2023. That lack of competition prevented a steeper correction.

Second, during the pandemic, most builders saw their profit margins expand to record highs. This provided builders with the flexibility to implement affordability adjustments, such as outright price cuts or mortgage rate buydowns. Many builders are offering reduced rates in the 4% or 6% range. This strategic move allows builders to retain a competitive edge in the face of challenges presented by strained affordability and elevated mortgage rates.

On Tuesday, Toll Brothers—a luxury builder that ranks No. 382 on the Fortune 500 list—became the last of the 10 largest publicly-traded homebuilders to report this earnings cycle, allowing ResiClub to update our homebuilder profit tracker chart (see above).

The chart above makes it crystal clear that spiked mortgage rates haven’t crushed homebuilders.

“We have continued to see solid demand through our fourth quarter, as we signed 2,038 net contracts at an average price of $989,000. Contracts were up 72% in units compared to last year’s fourth quarter and down 11% in average price, reflecting our strategic shift in mix [smaller homes]. Based on our non-binding deposit activity through the first five weeks of our first quarter, demand remains solid and consistent with normal seasonality,” wrote Douglas Yearley, CEO of Toll Brothers, on Tuesday. “As we approach the start of the spring selling season in January, we are encouraged by the recent 75 basis point drop in mortgage rates. With resale inventories at historic lows, buyers continue to be drawn to new homes, and we expect lower rates with lower inflation to add to this already solid demand. Our strategy of broadening our home offerings to include lower price points, coupled with our focus on increasing our supply of spec homes and growing our community count, has positioned us well for this market.”

Yearley added that: “Over the long-term, the outlook for the new home market remains bright, supported by favorable demographics, the supply-demand imbalance that has resulted from over a decade of underproduction, and the aging of the country’s existing housing stock. With our industry-leading luxury brand, Toll Brothers is well positioned to capitalize on these trends.”

Big picture: Deep-pocketed publicly traded homebuilders seem to think they’ve cornered the U.S. housing market amid the ongoing affordability squeeze. At least that’s the message they keep delivering.

The average 30-year fixed mortgage rate, as tracked by Mortgage News Daily, slipped to 7.04% today. That’s the lowest reading since August 8th.