Toll Brothers Inc. Chief Executive Officer Douglas Yearley said business is flat seven weeks into the homebuilder’s fourth quarter as buyers are temporarily holding back after an abrupt rise in mortgage rates.
“The move from 3.5 percent to 4.75 percent happened so quickly,” Yearley said in a panel discussion at the Bloomberg Markets 50 Summit in New York today. “There were some buyers that had to digest it.”
Orders slowed in the fiscal third quarter for Lennar Corp. and KB Home, the homebuilders reported today, in a sign that rising mortgage rates are cooling demand. For Horsham, Pennsylvania-based Toll, the largest U.S. luxury-home builder, the flat sales in recent weeks follow a strong comparison to a year ago, Yearley said.
The number of contracts signed to sell new homes dropped 13 percent in the U.S. in July from June, according to the Commerce Department. The median price gained at an 8.3 percent pace from a year earlier, slower than the prior month’s 11 percent increase and less than half of April’s 18 percent jump.
Sales probably increased 6.6 percent in August, according to the median estimate of 77 economists. The Commerce Department is due to report the figures tomorrow.
Homebuilders had been some of the biggest winners from the Federal Reserve’s efforts to push down borrowing costs to record lows, with a Bloomberg stock index of 14 companies more than doubling in 2012. The gauge was little changed in the three months through today as 30-year mortgage rates jumped from a near-record low of 3.35 percent in May to 4.57 percent at the beginning of September, according to Freddie Mac.
Rates dropped to 4.5 percent in the week ended Sept. 19, and may fall further after the Fed’s decision not to curb its purchases of bonds.
“The market is digesting and accepting that and understanding that it’s still a great rate,” Yearley said. “We are going through a little bit of a pause here where the builder numbers are a little bit flat, but we still feel that it will be just fine.”
Strict mortgage-lending standards and a scarcity of available land means the U.S. will see fewer homes constructed than the 1.5 million built annually before the housing crash, Yearley said. Toll Brothers and other publicly traded builders have been able to increase their earnings amid tight supplies of existing homes on the market and rising demand from buyers.
“So many people want to either own their first home or move up,” Yearley said.
Among commercial properties, a rise in interest rates hasn’t been “abrupt” enough to undermine the high prices paid for recent deals, said Richard Lefrak, chairman of property firm Lefrak Organization, which owns more than 400 buildings.
“If we saw rates normalize and long term rates will jump to 6, 7, 8 percent, a lot of the transactions that happened in the last 24 months will be trashed,” he said at the conference.
Owners who paid high prices after borrowing at low rates must be “well capitalized” to weather an inevitable rise in interest rates, said Steven Witkoff, chief executive officer of New York-based developer Witkoff Group LLC, which is building several ultra-luxury condominium projects in Manhattan
“All that cheap money is causing a real escalation in costs,” he said.