Mortgages for New Homes Rise, Refinancings Fall (PHM, LEN, KBH, DHI, TOL, HOV, BZH)

Just last week the Mortgage Bankers Association, MBA, released its forecast for mortgage rates and numbers for the rest of 2010 and 2011. The association expect 30-year mortgages to fall through the fourth quarter of 2010 to 4.4%, then rise to 5.1% by the end of 2011. Sales of new homes are also expected to grow as unemployment falls slightly.

Today the MBA released its summary of mortgage applications for last week, which shows a decline of -5% on a seasonally adjusted basis from the week before.

This is not good news for homebuilders. PulteGroup, Inc. (NYSE:PHM) reported an EPS loss of -$2.63 this morning on nearly $1 billion in impairment and other charges. Lennar Corp.

(NYSE:LEN) reported an EPS gain of $0.06 for its third quarter, but that is expected to fall to a gain of $0.02 in the fourth quarter and to a loss in the first quarter of 2011. KB Home (NYSE:KBH) reported a loss in its third quarter and a similar loss is expected in the fourth quarter. DR Horton Inc. (NYSE:DHI) is expected to swing to a loss of -$0.04 in its third quarter and do no better than break even for the fourth. Toll Brothers Inc. (NYSE:TOL) posted a loss in its third quarter and another is expected in the fourth. Hovnanian Enterprises Inc. (NYSE:HOV) and Beazer Homes USA Inc. (NYSE:BZH) are also on track to match or exceed previous losses.
The MBA also reported that refinancings fell -6.4% last week, and the refinancing portion of mortgage applications fell from 82.3% of the total to 81.3%. Adjustable-rate mortgages applications rose from 5.3% of the total to 5.4%.

Interest rates for 30-year fixed-rate mortgages rose from 4.25% to 4.28%. For 15-year fixed-rate loans interest rates fell from 3.67% to 3.64%.

Mortgage loans are very cheap, but few people want to borrow. There are at least two contributing factors to that reluctance. First, in order to get a loan a person needs gold-plated credit. The old saying that you can only get a loan if you don’t need it appears to be the main qualification for a borrower.
Second, people are scared to death about losing their jobs. Unemployment is not falling, wages are not rising, and some things are getting more expensive. Like food and gasoline, for instance.

If cheap money can’t entice borrowers, homebuilders are in for a lot more pain. In its earnings release, PulteGroup had only this to say about next year.

“As industry conditions are expected to remain challenging over the near term, we are continuing to reduce direct construction and overhead costs, and are restructuring our operations to trim 2011 SG&A spending by approximately $100 million on a year-over-year basis. Further, with almost 800 communities nationwide, a robust pipeline of finished lots and a supportive cash position, PulteGroup is in an excellent competitive position and remains focused on achieving its immediate goal of consistent profitability.”
Translation: “We’re building fewer homes, so we plan to lay off people to save money. We have too many homes for sale, but we’re not any worse off than anybody else.”

Paul Ausick