Lennar Corporation (LEN), D.R. Horton, Inc. (DHI): Could Rising Rates Deflate the Housing Rebound?

In the first quarter, unit sales were up 33%, year over year, and new orders were up 36%. Backlog was up 36% based on units and 57% in dollar terms. The value of the average home delivered in the quarter was $577,000, up from $569,000 the prior year. However, the average price of a home in the backlog is $693,000. Clearly, prices are heading higher.

Rate rocket

Interest rates being at historic lows have been a huge support to the housing market. Low rates simply make buying a house easier. That said, the slight uptick in interest rates of late has lit a fire under some home buyers. Only this time, the push is to lock in cheap rates while they last.

Bloomberg notes that mortgage rates are at their highest level in more than a year. That could be a mixed blessing for the home builders. In the near-term, buyers will feel more pressure to buy homes before rates move too high and push a purchase out of reach. However, there will be a tipping point where rates go too high and home sales fall off.

Who gets hurt first?

D.R. Horton, Inc. (NYSE:DHI) and Lennar Corporation (NYSE:LEN) are likely to see home sales cool before Toll. Their starter home segment is likely to be more sensitive to affordability issues than Toll’s higher-end customers. Investors should keep a close eye on the new contracts and average selling prices at D.R. Horton, Inc. (NYSE:DHI) and Lennar Corporation (NYSE:LEN). That could give an indication of future risk at Toll.

All three stocks, however, are being driven by momentum investors right now. So, quick shifts in sentiment are a key risk. The recent market downdraft has taken all three lower of late. However, as long as fundamentals remain solid, the stocks should hold up relatively well. That said, be ready to move fast if rising rates change the sales environment for the worse.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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