new home orders dropped significantly at californiabased builder kb home in its fourth quarter it’s the latest illustration of how rising mortgage rates have weighed on builders mortgage rates have retreated a bit offering some optimism for investors—but analysts say it may be too soon to bank on an easy housing recovery kb home ticker kbh last week reported 692 net new orders in its fourth quarter—less than half of the 1964 expected by factset consensus estimates and about 80 fewer than the same quarter one year prior the net decline was due to a combination of low gross orders and an increase in cancellations kb home ceo jeffrey mezger said on a conference call the quarter which ended nov 30 reflects a point in time when the average 30year fixedrate mortgage was near or above 7 according to freddie mac data—the peak of a climb from historically low rates that came as the federal reserve tightened monetary policy to control inflation “high mortgage rates and persistent inflation together with an uncertain economy have made home buyers more cautious since the middle of last year” mezger said in a statement “in the fourth quarter we prioritized delivering our large backlog and protecting our high margins over taking steps to stimulate additional sales during this seasonally slower time frame” kb home isn’t the only builder that saw demand slow at the end of 2022 lennar len another public builder that recently reported earnings for the same period said its new orders fell 15 to 13200 homes in the fourth quarter “as a first playbook strategy we detailed that we’re going to continue to sell homes and adjust pricing to market conditions and maintain reasonable volume” lennar chairman stuart miller said during the company’s december conference call that means the company’s margins not its volume is the “socalled shock absorber” he added lennar’s gross margin on home sales fell to 248 in its most recent quarter from 28 in the yearago period according to factset dr horton dhi the nation’s largest public home builder is set to post earnings on jan 24 for the quarter ended dec 31 analysts expect it to report 14890 new orders a 31 decrease from the same quarter last year and a margin of 235 down from 274 in the first quarter of 2022 according to factset the impact of the late 2022 rise in mortgage rates was broad weighing on existinghome sales and builder confidence alike existinghome sales in november the most recent month for which data is available fell for the 10th straight month builder sentiment measured as an index by the national association of home builders fell every month in 2022 according to the organization “in this high inflation high mortgage rate environment builders are struggling to keep housing affordable for home buyers” jerry konter the national association of home builders’ chairman said in a statement last month he added that 62 of builders reported using incentives to improve sales while 35 cut prices better news could be in store in 2023 analysts wrote recently the end of 2022 could have been the bottom for orders a team of bofa analysts and strategists said “demand will likely remain weak in spring but we think orders troughed in 4q22” wrote bofa analysts rafe jadrosich and shaun calnan and strategist chris flanagan in a note orders will improve sequentially in 2023 they added citi researchers also expect orders to improve a citi research team led by anthony pettinari said it was “selectively positive” on builders favoring pultegroup phm “the spring selling season should be weak but a stabilization of 2h net orders should be a catalyst” they wrote kb home’s mezger said the company expects yearoveryear net orders to improve to a midpoint of 1900 in the first quarter with kb home targeting a firstquarter decline between 50 and 60 from the “incredibly strong comparison” one year prior in the first five weeks of the new quarter net orders were down 72 the ceo said one reason for optimism in the housing market mortgage rates have trended down since rising above 7 in 2022 “mortgage rates have declined from peak levels and are poised to move lower in 2023” the bofa team wrote builder valuations are already accounting for lower prices and weaker demand the analysts wrote and builder margins could be helped by lower materials costs the team upgraded shares of pultegroup and toll brothers tol to buy from neutral and shares of lennar to neutral from underperform nvr  nvr  another large home builder is the analysts’ “top pick for builders” the team wrote “ nvr is not immune to the housing slowdown but shares have historically outperformed in weak housing markets due to its assetlight model” they wrote the bofa team is not alone in expecting mortgage rates to fall following a consumer price index report that showed inflation continued to cool in december national association of realtors chief economist lawrence yun said mortgage rates could fall below 6 “inflation has been coming down mortgage rates will also therefore come down” yun said in a release investors appear to be hopeful the spdr sp home builders exchangetraded fund xhb and the ishares us home construction etf itb two etfs that track home builders and related industries have returned about 97 and 92 respectively so far this year beating the sp 500 index but an easy housing market recovery isn’t guaranteed “the seemingly perennial event known as the ‘hope trade’ for home builders has not disappointed” raymond james analyst buck horne wrote in a jan 9 note “despite the growing optimism that the us economy can thread the needle we still believe a ‘hard landing for housing’ is still the most likely path forward in 2023” the analyst upgraded shares of toll brothers to outperform from market perform and downgraded shares of dr horton to market perform from outperform “for now we believe the best most attractive riskreward opportunity lies in moving up the price point curve towards toll brothers  ” horne wrote the recent fall in mortgage rates has not remedied affordability concerns  the analyst wrote “despite the recent pullback in mortgage rates to 65 paymentincome ratios remain uncomfortably above prior 2006 peaks” horne wrote “home sales activity and buyer traffic remain shellshocked entering 2023 and housing markets across the country remain in ‘price discovery’ mode” home affordability along with a weaker economy is one of the reasons why rbc analyst mike dahl expects demand difficulties to persist the analyst wrote in a note “demand has remained depressed despite the pullback in rates” dahl wrote adding that he expects the spring selling season “will bring disappointment along with further downside to prices” he downgraded shares of dr horton  lennar and dream finder homes dfi to underperform from sector perform and kb home to sector perform from outperform