Rising Interest Rates, Falling Orders Eat Into Home Builders’ Earnings

Rising mortgage rates and declining new orders dealt home builders a double whammy in late 1994, knocking down earnings in the last quarter compared with a year earlier.

Analysts say stock prices of most members of the home building group skidded an eye-popping 40 percent in 1994, with several sliding as much as 50 percent.

But several companies that were able to stage successful expansion plans will likely post impressive results, analysts say.

“The rise in interest rates has slowed housing sales, particularly for the last six months,” Montgomery Securities housing analyst James Wilson said. “It hasn’t been a disaster, though.”

Early in 1994, home builders bet that lower rates for mortgages would spur demand. As a result, many built homes on speculation, hoping buyers would eventually come calling. But interest rates rose, leaving builders with a backlog of new homes.

As a result, many companies have been discounting houses to get inventory off their books.