What a difference a percentage point makes. A slight rise in U.S. mortgage rates—the average for a 30-year fixed mortgage inched from about 3.3 percent in May to 4.3 percent this week—is spooking would-be home buyers and complicating forecasts for builders. Much to the agony of those builders, younger consumers appear transfixed by the shockingly low rates of recent years without paying any mind to historical mortgage norms.
Skittish buyers have become more worried about rising rates than they are about surging home prices, according to a new survey from real-estate data company Trulia (TRLA). Some 41 percent of respondents cited interest rates as their top concern, compared with 37 percent who pointed to prices. “We did anticipate that it would be a big concern; we just didn’t realize quite how much,” says Trulia spokeswoman Daisy Kong. “Low interest rates were the one thing people were able to count on for a while.”
And financing jitters aren’t just showing up on studies—those anxieties were abundantly evident in a round of reports from big U.S. homebuilders this week. D.R. Horton (DHI) posted only a 12 percent increase in new orders for homes from the year-earlier period, less than half the amount expected, while PulteGroup (PHM) saw its orders drop 12 percent. “A lot of buyers were counting on trying to pick the low in the pricing and the low in the interest rates,” D.R. Horton’s chief executive, Donald Tomnitz, said on a conference call.
Executives have tried to downplay the fallout in their earnings presentations, arguing that a lot of things are worse than rising rates. A supply shortage, for one. A crummy economy, for another. “As an industry,” PulteGroup CEO Richard Dugas says, ”we can sell more houses if more people have jobs, even with modestly higher rates.”
Investors haven’t been reassured, sinking shares of both homebuilding companies. Barclays analysts this morning downgraded builders across the board, cutting its assessments of seven companies in all. “Interest rates will have a more significant effect on builder fundamentals than we had previously thought,” they wrote.
So what can homebuilders do? They can try giving their potential customers a history lesson. First-time buyers are far more likely to balk at interest rates, and those newbies probably have little idea how steep rates can get. When mortgages flirted with 20 percent in the early 1980s, these folks were watching He-Man and playing with Cabbage-Patch Dolls.
The whole industry needs to channel every crotchety grandpa who ever made a speech starting with “in my day,” only with a message that actually proves effective with millennials who might be on the market for a home. If done well, financing at 5¢ on the dollar will look like cheap money.