Some of the nation’s largest homebuilders are lowering prices, offering rebates and pulling out of land deals as higher mortgage rates on top of already high home prices continue to hurt affordability for buyers.
On Thursday, Miami-based Lennar Corp. and Los Angeles-based KB Home both reported higher profits and revenue year-over-year, but lower new orders and slower traffic. buyers because of the higher rates.
Lennar’s profit rose 4% to $1.47 billion, but its nationwide new orders fell 12% year-over-year to 4,366 homes. KB Home pocketed $255.3 million, 70% more than a year ago, while orders fell 30% year-over-year to 3,137 homes.
Stuart Miller, executive chairman of Lennar Corp., said the housing market weakened as expected in response to the Fed’s quick and aggressive response to inflation that came too late, adding that the use by the Fed’s interest rate cuts to reduce inflation had the desired effect on housing. .
“Movements in interest rates were very sudden and adjusted very quickly, and that suddenness always led to a pullback in housing demand,” Miller said. “Some of the pullback is driven by sheer affordability, and some of the pullback is driven by the psychology of interest rates suddenly and aggressively rising, causing either a monthly payment sticker shock or sentiment for missing the boat.”
New orders for Lennar homes in its 217 active Texas communities rose from 3,203 in the third quarter of 2021 to 2,577 in the last quarter.
The automaker has categorized cities into three tiers based on their current performance levels. Dallas, Houston and San Antonio are among 23 markets in the second tier, which includes areas where the automaker has had to adjust prices and incentives more than in others to regain momentum due to slower traffic and an increase in cancellations.
“While inventory is limited in each of these markets, we have had to offer more aggressive financing programs, base price reductions and/or increased incentives to reinvigorate sales,” said Richard Beckwitt, co-director general of Lennar.
Lennar placed Austin in the harshest category as one of seven markets that saw the most significant easing and correction.
“As we lower prices and increase incentives, the demand is still there,” Miller said. “Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down payments and have attractive credit ratings and can qualify.”
KB Home – which is building in 47 markets across the United States, including Dallas-Fort Worth – has already seen a slowdown in orders due to the latest mortgage rate spike since Labor Day. Its cancellation rate, or the number of transactions that failed after signing the contract, was 35% last quarter compared to 9% in 2021.
“The #1 reason for the cancellation was buyer’s remorse,” said Jeffrey Mezger, president and CEO of KB Home. “It wasn’t necessarily that the buyers didn’t qualify. They didn’t feel comfortable going ahead with the purchase.
KB Home experienced a delay in deliveries compared to expectations due to longer construction times and ongoing supply chain challenges. The builder completed 3,615 homes in the United States last quarter and has an order book of 10,700 homes that it expects to deliver over the next three quarters.
Robert McGibney, chief operating officer of KB Home, said the builder had completed homes it couldn’t deliver in the second quarter because utility providers couldn’t get transformers and electric meters, and had also faced delays in obtaining switchgear and cables. He used Houston as an example, where 77 homes across three communities were completed and were scheduled to close in the third quarter, but were postponed due to lack of transformers.
“We are focused on what we can control, and we are optimistic that with slow start-ups in most of our markets and our larger scale, we can return to our historical build times, although it will take time. to achieve,” McGibney said.
KB Home invested just $135 million in new land acquisitions, down 71% from $467 million a year earlier. Jeff Kaminski, chief financial officer, said the company is moving toward a more selective land investment strategy “in response to easing housing market conditions and our ability to grow land positions already under control to boost future and new community openings”.
Additionally, the company discontinued approximately 8,800 previously controlled batches during the quarter. In some cases, land sellers were unwilling to cut prices because other builders were waiting in the wings, Mezger said. Other sellers were at price points or in areas that would not have generated enough return.
“We do everything and anything to preserve these positions, but if it doesn’t make sense, we are ready to walk,” he said.
Lennar also left 10,000 home sites last quarter alone. Jonathan Jaffe, co-chief executive of Lennar Corp., said the company focused on “re-evaluating every land deal in our pipeline” throughout the quarter.
Arlington-based DR Horton reported a sharp drop in demand in the second quarter in July. Pennsylvania-based Toll Brothers, the largest U.S. luxury carmaker, also said in August it had cut its sales forecast for the fiscal year and increased incentives for buyers.
Ben Caballero, founder and CEO of Dallas-based HomesUSA.com, is a real estate agent who lists homes on real estate association multiple listing services on behalf of builders. His company has seen a huge influx of business from builders needing to publicly list homes after cancellations began to spike earlier in the year.
Caballero said a sign of falling demand is that in addition to offering various incentives to buyers, builders have increased commissions to real estate agents.
“Their thinking is that if they offer a realtor a bonus of $5,000 or $10,000, then the realtor is going to bring his client to him rather than someone else,” he said. -he declares.