America’s homebuyers are feeling the squeeze, according to homebuilder Lennar (NYSE:LEN). In a recent post-earnings conference call, Lennar noted that consumers are increasingly pressured by persistent price increases and are seeking ways to reduce home-buying costs.
“Given the current inflation rates and living expenses, consumers are definitely feeling more distressed. We’re also seeing more credit challenges among potential buyers,” said Stuart Miller, Executive Chairman and Co-CEO of Lennar, during the company’s second-quarter earnings call. Lennar’s average sales price of homes delivered in the quarter was $426,000, down from $449,000 in the same period last year.
“We’re facing a supply shortage, but consumers are looking for incentives or discounts out of necessity to afford the homes they need,” Miller added.
The current housing affordability crisis is attributed to the Federal Reserve’s measures to curb inflation and a chronic lack of supply. About a week ago, the central bank signaled an anticipated interest rate cut this year. While the Fed doesn’t directly set mortgage rates, the rates offered by lenders usually follow its lead.
“If the Fed starts cutting rates, we believe it will activate pent-up demand,” Miller remarked. To attract buyers amid high mortgage rates, Lennar and other homebuilders have offered concessions like mortgage rate buydowns.
However, these incentives have raised concerns about their impact on profit margins. In the latest quarter, Lennar forecasted a gross margin of 23% for home sales in Q3, falling short of analysts’ expectations of 24%, according to Bloomberg data. This led to Lennar’s stock dropping by up to 5% during Tuesday’s trading.
“We believe the choppy mortgage rate environment that persisted until May likely necessitated higher incentives, which will affect Q3 closings,” noted Raymond James analyst Buck Horne in a report.
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