Tuesday, Toll Brothers Inc. (TOL) a builder of luxury homes, cut its fiscal 2006 earnings forecast and indicated that it would build fewer homes next year because of softening demand. And according to McGraw-Hill Construction new construction starts (seasonally adjusted) for September slipped 2% in September http://www.construction.com/.
At least a portion of these declines can be attributed to rising interest rates on home loans which have risen to their highest levels in 16 months. Also compounding problems in the housing market have been rising energy prices and higher costs for building materials.
So what should the potential home buyer do? I think Toll’s disclosure is an early signal of softer times for home prices due to less speculative buying in the market and to rising interest rates. I expect mortgage rates to continue to climb consistent with elevated inflation and with reduced U.S. Treasury buying by the Chinese. Furthermore, the rebuilding on the U.S. Gulf Coast will result in higher building costs pushing the prices of homeownership outside the limits of some buyers.
But what is a home buyer to do? My advise to the buyer is to lock in today’s still relatively low mortgage rates for as long as possible. Then wait on the softer housing market. While prices are not likely to plummet, they are likely to plateau with the buyer having rising bargaining power and more housing possibilities. If you are a seller, I recommend that you sell now, if feasible, rather than waiting until rates rise and prices soften.