Baseball is 90 percent mental. The other half is physical." – Yogi Berra

Because it may be too soon to say it's deja vu all over again.

PulteGroup ceo and president Ryan Marshall's prepared comment accompanying second-quarter earnings this morning includes a sentence that embeds a mathematics and a psychology problem for homebuilders.

The recent 200-basis point increase in mortgage rates has impacted affordability, but we continue to believe the desire for homeownership is high and the long-term outlook for housing remains positive."

The math problem will very likely get tougher by the end of tomorrow – at the conclusion of the Federal Reserve' Federal Open Market Committee meeting. It's only a question of degree. A Funds Rate increase and any pressure that exerts on mortgage rates, of course, erodes the base of would-be buyers on plain and simple technical terms – i.e. these households would no longer qualify as conventional home mortgage borrowers unless they suddenly get a huge raise or come up with a way to pay a much higher down payment.

That's not the end of it, by any means. Other parts of this "it-doesn't-all-add-up" arithmetic issue is the sticky high Average Selling Price levels builders reached this past Spring as they tested price elasticity limits while the feeding frenzy of demand played out right up into and through the first calendar quarter of 2022.

One other dimension of the math problem not to forget is this: Inflation's impact on payment power. When prices on major consumer goods and services are all spooling upward, it takes a toll – on down payment savings, on monthly payment power, on buying all the other things a household needs if and when they make a move on the new home purchase.

Those matters go with the turf of the math challenge. A Fed hike – be it three-quarters-of-a-percent, or more, or less – will weigh into that math challenge as mortgage (and builders' borrowing) costs track higher.

However, if mathematics were the only impact to who it is will go through with the purchase of new homes they're already slated to buy, and who will step up in the weeks and months ahead as undeterred buyers with the means to go ahead and close, there'd be less to worry about now.

Math was the initiation point in this move downward in demand," Carl Reichardt, managing director for equity research at BTIG, covering homebuilders and building products enterprises. "Prices plus the change in rates had already been pricing out local buyers in many of the U.S.'s most active new home markets – and for a brief period, it was migration away from hyper-expensive coastal markets into these more reasonably-priced active markets that made up for the missing local buyer demand."

Solving for the math problem – as challenging as it may be, takes a math response. As Reichardt would describe the accelerated pace of transaction, complexion, and outlook change in markets around the nation, and the gamut of switches and levers – from interest rate locks, to lot premium incentives, to price concessions, on up – the new moving target every builder's shooting for in every community everywhere is a "market clearing price" that resecures the very basic condition necessary for homebuilders to make money, which is to turn inventory.

A more gnarly, harder-to-reverse consumer trend that may be making its way into home buying market behavior concerns the psychological catalysts and inhibitors – the Animal Spirits – that give housing booms and busts alike their steepest and perhaps longest-running trajectories. In last week's interchange with D.R. Horton executives reporting the firm's fiscal 2Q earnings, Reichardt zeroed in on the differences between the math challenge and the mental one.

Here's his question and D.R. Horton chairman, ceo David Auld's reply:

CR: I wanted to ask about the change in cancellations as you guys look at this – is your sense that this is really just a mathematics issue, high rates, higher prices, folks can’t afford or is this more psychological? In other words, folks are a little scared of what the value of their house might do? They are concerned about the economy or their jobs. I’d just like sort of your sense, especially compared to past cycles of how you see the acceleration in cans, which you would attribute that to

David Auld: I think it’s probably a little of both. I think payment shock was part of it. Toward the end of June, middle of June, we had a 100 basis point increase in long-term rates over about a 3 or 4-day period. I think that impacted it. Most people still remember 2008, ‘09, ‘10 when worst housing market I’ve ever seen and values deteriorated, which again, not typical in our history of our country.

What executives continue to try to focus their investor-analyst-and-public audiences on is that, so far, their sales and operations teams have been working furiously to detect and trigger a new delicate balance between giving back on price, but not losing so much that it would set off a domino-effect of pricing concessions that would harm the ability for the company and the consumer to generate value.

And, so far, they're saying the tool-box of mechanisms to move inventory through the backlog and into the order pipeline is doing its job.

However, Reichardt warns, stay tuned.

"If we morph from a math problem to a more pervasive psychological one, look out," he says. "As it is we see it, we've got a very sharp V shaped correction happening. And that's just the math part of it."

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