(Reuters) - U.S. homebuilder PulteGroup Inc reported its worst quarterly fall in orders since 2013 on Tuesday and said it was having to spend heavily on incentives for buyers, weakening its margins, in the face of the shakiest outlook for spring sales in years.
Shares in the country’s third biggest housebuilder fell 7 percent after an earnings release and conference call which showed orders had fallen 11 percent year-on-year in the fourth quarter and forecast first quarter margins below analysts’ expectations.
Chief Executive Officer Ryan Marshall said incentives for Pulte have been effective in increasing sales, but joined larger peer D.R. Horton Inc in suggesting last year’s rises in U.S. house prices were discouraging buyers.
“Thinking about 2019, there is less certainty about demand heading into this spring selling season than the industry has experienced in a number of years,” Marshall said on the call with analysts.
Homebuilders in the United States have increased spending on incentives to ease pressure on buyers’ ability to afford homes as interest rates rise and a combination of a stronger market and higher land and labor costs pushes prices higher.
Pulte forecast first-quarter gross margins to be between 22 percent and 22.5 percent, falling short of analysts’ estimates of 23 percent, according to IBES data from Refinitiv. The company had gross margins of 23.2 percent in the first quarter of 2017.
RBC Capital Markets analyst Michael Dahl said in a note to clients that Pulte orders were well below expectations.
“We still expect margins to decline in the coming quarters as others such as Horton and Lennar have leaned into incentives,” he said.
Horton said last week it had faith that demand for the No. 1 U.S. homebuilder’s homes would improve in the spring and Lennar has also cited improvement in sales in its new fiscal year as mortgage rates start to ease from last year’s highs.
Pulte said it had increased incentive compensation and sales commissions in the reported quarter, with sales discounts now about 3.3 pct of its average sales price.
“Rise in interest rates may be better viewed as the proverbial final straw, rather than a trigger as it came on top of several years of home price appreciation and growing affordability challenges,” Marshall said.
Any quick or unexpected moves by the Federal Reserve in the coming months could significantly improve or erode how the company felt about the spring season, he added, also underlining that overall he remained “constructive” on the market.
While economists expect affordability to improve, they also caution that changes to the tax code in December 2017, which limited deductions for mortgage interest and property taxes, have reduced the appeal of home ownership.
Reporting by Sanjana Shivdas in Bengaluru; Editing by Shounak Dasgupta
Our Standards: The Thomson Reuters Trust Principles.