Mortgage

Lennar begins reducing costs in cooling U.S. housing market

Lennar Corp. has started trimming prices and offering buyer incentives in some areas of the U.S. to bolster sales in a cooling housing market.

Rapidly rising mortgage rates and economic headwinds have depressed new orders and buyer traffic in June and increased deal cancellations, the builder said on a call with analysts Tuesday.

For now, Lennar is sticking to its earlier forecast for deliveries of about 68,000 homes in its full fiscal year. The catch is that, with demand now starting to wane after the pandemic boom, “current attempts at guidance are tantamount to ‘guessing’ and not ‘guiding,’” Executive Chairman Stuart Miller said in the company’s earnings statement. He warned about the slowdown already underway, calling it a “complicated moment in the market.”

Shares of the Miami-based builder rose after it beat expectations for orders and profit margins in the quarter through May — a period when buyers were still rushing to lock in deals. But “the weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider,” Miller said in the statement. “We began to see these effects after quarter end.”

Seven regions had significant slowdowns this month, Lennar said. They were: Raleigh, North Carolina; Minnesota; Austin, Texas; Los Angeles, the Central Valley and Sacramento in California; and Seattle. The company increased incentives, such as mortgage rate “buy-downs,” and lowered prices in some subdivisions to boost demand.

Lennar reported that purchase contracts for the three months through May rose 4% from a year earlier to 17,792, beating analyst estimates. The gross margin on home sales jumped to 29.5% from 26.1% in its previous fiscal second quarter. The shares climbed 2.4% to $66.15 at 2:43 p.m. New York time. The S&P 500 index gained 2.6%. 

Rough Seas

Homebuilders are facing rough seas ahead with mortgage rates that have soared at the fastest rate in more than 50 years of record-keeping, according to data from Freddie Mac. The Federal Reserve, in its efforts to tamp down rampant inflation, is managing to cool the overheated housing market, and Lennar says it’s well-positioned to maintain its sales in many regions.

Lennar’s quarterly results were “impressive and highlight the company’s execution and production-oriented focus, which could support share gains in a declining market,” said Bloomberg Intelligence analyst Drew Reading.

Yet while the shares may rise initially, “investors may not be willing to underwrite any near-term positives given the acknowledgment of slowing demand and a less-favorable pricing environment which will likely see an increase in incentives that could also pressure outsized margins,” Reading said. 

Supply Chain

One thing that may help builders is that challenges in getting materials appear to be easing. For Lennar, the time it took to build a house in the quarter increased “only slightly sequentially,” said Jon Jaffe, co-chief executive officer, a sign that the supply-chain issues that have plagued the industry have started to subside.

Lennar and other builders will need to manage the effects rising interest rates will have on demand, and that may include having to drop prices to lure in buyers.  

“The Fed’s stated determination to curtail inflation through interest rate increases and quantitative tightening have begun to have the desired effect of slowing sales in some markets and stalling price increases across the country,” Miller said. “While we believe that there remains a significant shortage of dwellings, and especially workforce housing, in the United States, the relationship between price and interest rates is going through a rebalance.” 

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