New home sales saw a modest increase in February, but affordability remains a significant barrier as high mortgage rates dampen demand. Homebuilders like Beazer Homes (BZH) are feeling the pressure, using incentives such as mortgage buy-downs that ultimately shrink their profit margins and have led to declining returns. In today’s FA Alpha Daily, we will explore the mortgage rates and buyer sentiments that pressure Beazer’s earnings growth and stock price.
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The housing market has shown a small uptick in new home sales for February, but the numbers still landed just shy of what many economists were hoping for.
Sales rose 1.8% month-over-month to 676,000 units, narrowly missing analyst expectations of 679,000, while year-over-year sales climbed 5.1%.
This modest rise offers a little optimism, but it does not change the broader reality. Demand for housing continues to feel pressure from mortgage rates that first started climbing in 2021.
Even though the Federal Reserve made rate cuts last year, the market remains sluggish, and many homebuilders like Beazer Homes (BZH) are struggling to turn the corner.
The root of the problem lies in affordability. Mortgage rates, which hovered near 3% in early 2022, now sit just under 7%.
Monthly payments have become a barrier for many buyers. A mortgage at today’s rates costs nearly double what it did three years ago.
When housing markets weaken, builders often rely on tactics like mortgage rate buy-downs or offering closing cost help just to keep interest levels steady.
These offers can bring in buyers, but they also shrink profit margins.
For Beazer, these concessions chip away at the bottom line, meaning that even when sales improve slightly, the company is not in a strong position to grow its earnings.
All of these issues caused the company’s Uniform return on assets ”ROA” to decline to 7% last year from 13% in 2022.
Investors have noticed these challenges and the company’s stock has dropped almost 20% since the start of the year.
Business conditions have also pushed Beazer Homes to think carefully about its community expansion plans.
The company has acquired land to grow its community count, which could boost its overall market presence in the long term.
However, with high mortgage rates, any aggressive expansion has to be timed well.
If sales remain soft, having too many new communities could force the builder to offer even deeper discounts.
On the other hand, if the market turns around, Beazer may benefit from being ready to meet pent-up demand.
For now, it is not surprising that investors remain cautious.
Our EEA model clearly shows this.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market expects the company’s Uniform ROA to decline further to 3%
A weak housing climate, combined with higher rates, continues to keep many potential buyers on the sidelines.
Beazer’s recent performance shows that these factors have already weighed on the company’s returns.
Until there is a clear signal that interest rates will drop further or that buyers are once again eager to move into new homes, it is reasonable to anticipate that Beazer’s stock may face ongoing pressure.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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