Why oil prices could make your house more expensive, according to PulteGroup

High housing costs are stunting sales and weighing on builder stocks. A big contributor to costs: the fluctuating price of oil, says the CEO of one of America’s largest home builders.

PulteGroup topped earnings expectations on Wednesday, though the ongoing housing slump pushed numbers below last year’s levels. The builder’s better than expected home sales gross margin is likely what convinced Wall Street that the home construction business is turning the corner.

PulteGroup shares were up 3.2% in morning trading.

Buyers right now are focused on keeping costs low across all consumer products—including purchasing homes, PulteGroup CEO Ryan Marshall said Wednesday on a conference call. “There are some things like lumber, like oil, that are commodities that make it much more difficult to influence [costs] because they’re much bigger than just housing,” he said.

“Lumber aside, which we can see where that’s going, oil probably probably continues to be the one that I’m most nervous about just because of how much oil is in some pretty big ticket items like land development,” he said.

The cost of oil carries over into undergound piping and asphalt, he noted—not to mention the fuel that land developers need to prepare a property for building.

“That could have an impact on not just price per square foot house costs, but ultimately maybe developed land costs—and, of course, that ultimately goes into the total, the total cost basket for the house,” he said.

Across the board, shifting mortgage rates and high prices have eroded the confidence of buyers. Mortgage rates, too, are connected to energy costs as expectations of future inflation factor into movements in the 10-year Treasury yield. That, in turn, determines the trajectory for mortgage rates.

The war in Iran has consequentially been a determining factor in the way housing stocks trade–and will continue to play a big role. Builder shares earlier this year rallied on ceasefire news—but pulled back as tensions escalated again.

PulteGroup posted second-quarter earnings of $2.48 a share, way off $3.03 in the year-ago period. Revenue fell about 9% to $3.98 billion, a hair above the analyst consensus call for $3.94 billion, according to FactSet.

None of this was a surprise for Wall Street, which expected earnings to fall further, to $2.36 a share, as home prices remain relatively high and mortgage rates swing wildly based on inflation expectations and news about the war in Iran. Tuesday’s 30-year fixed mortgage rate gauged by Mortgage News Daily was 6.75%, higher than the roughly 6% levels seen earlier this year that gave investors hope for a housing rebound.

PulteGroup’s margin on home sales were a better-than-expected 25%. Margins have been compressed in the sector as builders offered sales incentives and discounts to buyers to keep homes moving. The conversation in the industry has focused on when margins will bottom.

There are been fleeting signs that the worst is over for the housing sector—but don’t expect big improvement until inflation expectations ease. “Market conditions remain highly competitive as macroeconomic uncertainty, volatile interest rates and strained affordability weigh on housing demand,” Marshall said in the earnings statement. “But there are early signs that conditions may be stabilizing in select geographies around the country.”

New orders increased 6% to 7,546 homes—valued at $4.1 billion. At the end of the quarter, PulteGroup had a backlog of 10,966 homes, up 2% from last year. The backlog value was $6.8 billion.

D.R. Horton reduced its full-year guidance on Tuesday despite posting better-than-expected third-quarter results, leaving Wall Street anxious about PulteGroup’s results.

PulteGroup stock is up about 6% this year—outperforming D.R. Horton, which is down 0.4%. The iShares U.S. Home Construction exchange-traded fund is down 1.4%.

However, PulteGroup shares have significantly lagged behind small and medium-size builders. Beazer Homes USA, LGI Homes, and Hovnanian Enterprises are up 60%, 36%, and 35%, respectively this year, according to FactSet.

Smaller builders have outperformed their larger competitors since Berkshire Hathaway’s deal to buy midsize Taylor Morrison at a 24% premium over its share price. Investors are now rushing to buy shares of undervalued small builders.

Write to Molly Bordoff at [email protected], Shaina Mishkin at [email protected] and Kit Norton at [email protected]