Lennar Corp., one of the nation’s largest homebuilders, has lowered home prices and boosted incentives in most of its markets across the country in response to higher interest rates.
With the Federal Reserve hiking rates again Wednesday, the home price adjustments will likely continue.However, executives with Miami-based Lennar (NYSE: LEN) said South Florida is one of the few markets where prices are mostly holding solid.
Jacksonville is one of the cities where price cuts have led to inventory moving faster, the company said.
During a conference call with analysts on Thursday, Lennar Executive Chairman [Stuart Miller](jacksonville/search/results?q=Stuart Miller) said the company will continue building and selling homes at the same pace, adjusting prices to keep demand strong despite higher interest rates.Because there is a housing shortage and the job market is strong, there is demand for homes but the prices have to be affordable even with mortgage rates doubling, he said.
“The housing market has continued to weaken in response to the Fed’s too late but now very rapid and aggressive response to inflation,” Miller said.“That suddenness has always led to a pullback in housing demand.The additional increase of 75 points yesterday, together with the articulation to do more, suggests that even more challenges lie ahead.”
Since home prices are lower, Lennar will not hesitate to walk away from land it has under contract if the deal doesn’t meet its underwriting criteria, which reflects what the homes are expected to sell for, he said.Miller said Lennar walked away from about 10,000 home sites it previously had under contract in the most recent quarter.
“In every land deal in the pipeline, we are doing underwriting not just one time but on a regular basis given the movements in market conditions,” Miller said.“We will walk away from programs or land under contract that doesn’t meet the underwriting criteria.”
Lennar generated higher sales and profits for the third quarter ended Aug.
31, but reported headwinds with new orders and cancellations.
Revenue increased 29% to $8.9 billion from the same quarter a year ago.
Its net income increased to $1.5 billion, from $1.4 billion, as profit margins on home sales grew.Home deliveries were up 13% to 17,248.
New home orders fell 12% to 14,366.Lennar Co-President and Co-CEO [Rick Beckwitt](jacksonville/search/results?q=Rick Beckwitt) said the cancellation rate was 21%, which was higher than normal.It started construction on more homes than it sold.
Lennar often prefers to keep the number of home starts and sales close to the same.
Sales prices were down 9% from the second quarter, although they were up 1% from a year ago, Beckwitt said.Incentives increased 6% from the second quarter.The average incentive was worth 4.5% of the price of the home.
The pricing trends varied widely by region as Lennar prioritized moving finished homes quickly.Beckwitt placed the regions Lennar operates in into three categories.
There were nine markets that continue to perform well, with low inventory, strong economies, and only a limited number of price adjustments.
That includes South Florida, the Palm Beaches/Treasure Coast, Southwest Florida, New Jersey, Maryland, Virginia, Charlotte, Indianapolis and San Diego.
Beckwitt said Lennar has completed price adjustments successfully in 22 markets, and the lower prices have resulted in more sales and prevented buyers from canceling.These markets include Tampa; Orlando; Jacksonville; Coastal Carolina; Atlanta; Chicago; Nashville, Tennessee; Raleigh, North Carolina; Dallas; Phoenix; the Inland Empire of California; Sacramento; and Portland, Oregon.When there’s finished inventory in a community there, Lennar adjusts prices and boosts incentives to sell it faster.
Finally, there were seven markets where buyer traffic has slowed and Lennar has yet to find the right prices to spur buyers to close, Beckwitt said.That is the case in Austin, Texas; Philadelphia; Minnesota; Utah; Pensacola; Reno, Nevada; and Boise, Idaho.
“Buyers are taking more time to make purchase decisions and many need time to build up confidence that it’s time to buy,” Beckwitt said of these seven markets.“We are focused on establishing prices to generate growth in sales.”
The company projected home deliveries between 20,000 and 21,000 and new orders between 14,000 and 15,000 in the fiscal fourth quarter.
Miller said Lennar will continue looking for land purchases, but the prices will depend on the current market for homes, so land sellers should adjust their expectations.Lennar may also look to purchase home sites from other buildings that can’t complete them, he added.
Lennar is also working with building suppliers to reduce costs and make homes more affordable.Co-President and Co-CEO [Jon Jaffee](jacksonville/search/results?q=Jon Jaffee) said construction costs were up 21% year-over-year, but he anticipates the construction labor shortage will start easing soon because of an overall decrease in construction across the country.
“Along with bringing prices down we are laser-focused on bringing down production costs,” Miller said.
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