(Bloomberg) — Lennar Corp. has started cutting prices and offering incentives to buyers in some areas of the U.S. to boost sales in a cooling housing market.
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Rapidly rising mortgage rates and economic headwinds have depressed new orders and buyer traffic in June and increased deal cancellations, the builder said in a call with analysts Tuesday.
For now, Lennar is sticking to its earlier forecast of delivering about 68,000 homes in its entire fiscal year. The problem is that, with demand now starting to decline after the pandemic spiked, “current attempts at guidance amount to ‘guessing’ and not ‘guiding,'” Chief Executive Officer Stuart Miller said in the earnings report. of the company. He warned of the slowdown that is already underway, calling it a “difficult time 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 close deals. But “the weight of a rapid six-month doubling in interest rates, coupled with accelerating price appreciation, has begun to prompt buyers in many markets to pause and reconsider,” Miller said in the statement. “We started to see these effects after the end of the quarter.”
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 “rebates” on mortgage rates, and lowered prices in some subdivisions to boost demand.
Read more: Builders cut prices to offload homes in rapidly cooling US markets
Lennar reported that purchase contracts for the three months through May rose 4% from a year earlier to 17,792, beating analyst estimates. Gross margin on home sales jumped to 29.5% from 26.1% in the previous fiscal second quarter. The shares rose 2.4% to $66.15 at 2:43 p.m. New York time. The S&P 500 index gained 2.6%.
Homebuilders are facing rough seas with mortgage rates soaring at the fastest pace in more than 50 years of records, according to data from Freddie Mac. The Federal Reserve, in its efforts to rein in runaway inflation, is managing to cool the housing market overheated, and Lennar says it is well positioned to maintain its sales in many regions.
Lennar’s quarterly results were “impressive and highlight the company’s production- and execution-oriented approach, which could support share gains in a declining market,” said Drew Reading, an analyst at Bloomberg Intelligence.
However, while stocks may rise initially, “investors may not be willing to buy into any short-term upside given recognition of slowing demand and a less favorable pricing environment that is likely to see prices rise.” incentives that could also put pressure on margins. Reading said.
One thing that may help builders is that the challenges of obtaining materials appear to be lessening. For Lennar, the time it took to build a house in the quarter increased “only slightly sequentially,” said Jon Jaffe, co-CEO, a sign that the supply chain problems that have plagued the industry have begun. decrease.
Lennar and other builders will need to manage the effects that rising interest rates will have on demand, and that may include having to lower prices to attract buyers.
“The Fed’s stated determination to reduce inflation through interest rate increases and quantitative tightening has begun to have the desired effect of slowing sales in some markets and stalling price increases across the country,” Miller said. “While we believe there remains a significant housing shortage, and especially worker housing, in the United States, the relationship between price and interest rates is undergoing a rebalancing.”
Read more: The increase in mortgages towards 6% slams the brakes on the red-hot real estate market
(Updates stock trading in sixth paragraph.)
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