Homes Crumble as Mortgage Rates Rise

The rising mortgage rates in the U.S. have pulled down the total mortgage applications in the country, thereby discouraging homebuyers. The 30-year fixed mortgage rate increased slightly to 4.93% from 4.92% in the last week, leading to a 2% drop in mortgage application on a seasonally adjusted basis.

The overall economic recovery has undoubtedly improved market conditions, making houses more affordable to consumers. But surprisingly this has not accelerated the housing activity much as a result of the twin problems of tight credit conditions and a considerable level of contract cancellations.

The limited credit availability is a crucial factor behind the decline in home sales in the U.S. economy. The banks have been tightening their credit facility mostly because of tightened lending standards and uncertain economic prospects.

In turn, lower demand for homes automatically slashed home prices which fell consecutively for each month of the year. The national median pre-owned home price for all housing types were $158,800 in January and $156,100 in February, while the median prices of new homes were $234,800 and $202,100 in the respective months. The aggravated cancellation rates in the country resulted from failed negotiations between the buyers and sellers on prices.

These were reflected in the weak performances of the nation’s major homebuilders like KB Home (KBH), Lennar Corp. (LEN), PulteGroup Inc. (PHM), Toll Brothers Inc. (TOL) and DR Horton Inc. (DHI).

For instance, KB Home’s revenues fell 25% to $196.9 million during the first quarter of fiscal 2011, driven by a 26% decline in housing revenues to $195.3 million. The company also posted a net loss of $38 million or 49 cents per share, which was much wider than the Zacks Consensus Estimate of a loss of 27 cents per share.

Similarly, Lennar’s homebuilding revenues dropped 10% to $466.7 million in the first quarter. However, the company managed to post a profit of $27.4 million or 14 cents per share, mostly because of a remarkable performance by the Rialto Investments.

PULTE GROUP ONC (PHM): Free Stock Analysis Report

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