CNBC’s Jim Cramer on Thursday reviewed recent earnings reports from major homebuilders Lennar and KB Home , expressing concern that the Federal Reserve’s rate cuts won’t help bring down mortgage rates.
“I think it’s better to take a wait-and-see approach to the homebuilders, just in case we see a repeat of last fall, where the Fed started cutting and it didn’t make a difference,” he said. “If anything, it drove the bond market in the wrong direction and mortgage rates higher.”
The Fed lowered its benchmark borrowing rate by 0.25% last week. A cut from the Fed is usually expected to bring down bonds as Wall Street anticipates lowered borrowing rates across the board. But in the wake of the Fed’s cut, longer term yields, including mortgage rates, failed to decline. In fact, the ten- and 30-Year Treasury yields — both of which influence mortgage rates — rose.
Lennar disappointed investors when it reported soft quarterly earnings last week, Cramer said, noting that management said “even though mortgage rates began to trend downward towards the end of the quarter, stronger sales have not yet followed.” The company also lowered earnings estimates for the current quarter and indicated that sales incentives managed to bring in more customers, but they hurt margins. But Cramer pinpointed a few encouraging aspects of the quarter, including that Lennar cut construction costs and now has a leaner cost structure that it says will be an asset once rates come down and demand picks up.
KB Home’s Wednesday report was a bit better than Lennar’s, Cramer said, but not by much. He noted that some key metrics came in better than expected, but the company cut its full-year forecast by a sizeable amount. Management maintained that the longer-term outlook for the housing market is positive due in part to the housing shortage, Cramer noted. But, like Lennar, KB Home also said that changing mortgage rates haven’t triggered an uptick in orders — and management suggested that “to some extent, buyers are in maybe a bit of a wait-and-see mode,” potentially holding out for rates to come down further.
Lennar and KB Home seemed optimistic that rates will start come down and business will improve, Cramer added. He suggested that lower rates are a necessity for the companies’ success, but he stressed that as of now, long rates are still on the rise despite Fed action.
“Based on commentary from Lennar and KB Home, the bulls clearly got ahead of themselves here,” he said. “Because so far we haven’t seen any meaningful increase in sales volume driven by lower mortgage rates.”
Lennar and KB Home did not immediately respond to request for comment.