America’s homebuyers are feeling the pressure as the housing market continues to challenge affordability.
Lennar Corporation (NYSE:LEN), a major homebuilder, highlighted on its post-earnings conference call that consumers are experiencing heightened financial strain due to persistent price hikes and are seeking ways to reduce the costs associated with purchasing a home.
“There’s no denying that with inflation and rising living expenses, consumers are feeling more distressed. We’re also seeing more credit issues among potential buyers,” Stuart Miller, Executive Chairman and Co-Chief Executive Officer of Lennar, stated during the company’s second-quarter earnings call on Tuesday afternoon. Lennar’s average home sales price in the quarter was $426,000, a decrease from $449,000 in the same period last year.
“We’re in a situation where there’s a supply shortage, but consumers are looking for incentives or discounts out of necessity to afford the homes they need,” Miller added.
The current affordability crisis in the housing market stems from the Federal Reserve’s measures to combat inflation, combined with a chronic shortage of housing supply. Recently, the central bank indicated it expects to cut interest rates once this year. While the Fed does not directly control mortgage rates, the rates offered by lenders usually follow the Fed’s trends.
“If the Fed starts cutting rates, we anticipate pent-up demand will be triggered,” Miller remarked.
Homebuilders like Lennar have been offering various incentives to attract buyers, despite high mortgage rates deterring both buyers and sellers. One common incentive, mortgage rate buydowns, has been effective in getting buyers to finalize purchases.
However, there are concerns among analysts and investors about the impact of these incentives on profit margins. In the latest quarter, Lennar projected its gross margin for home sales in Q3 at 23%, falling short of analysts’ expectations of 24%, according to Bloomberg data, causing Lennar’s stock to drop by as much as 5% in Tuesday’s trading.
“We believe the fluctuating mortgage rate environment that persisted until May likely necessitated higher incentives, which will impact Q3 closings,” noted Raymond James analyst Buck Horne in a report.
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