Some of the country’s largest homebuilders are cutting prices, offering rebates and pulling out of real estate deals as higher mortgage rates, on top of already sky-high house prices, continue to hurt buyer affordability.
Miami-based Lennar Corp. and Los Angeles-based KB Home on Thursday reported rising earnings and revenue but a decline in new orders and a slowdown in buyer traffic on higher rates.
Lennar’s profit rose 4% to $1.47 billion, but its new orders fell 12% year over year to 4,366 homes. KB Home pocketed $255.3 million, up 70% year over year, while orders fell 30% year over year to 3,137 homes.
Stuart Miller, chief executive officer of Lennar Corp., said the housing market weakened as expected in response to the Fed’s quick and aggressive response to inflation, which came too late, adding that the Fed’s use of interest rates to contain inflation would have the desired effect on housing construction.
“Interest rate moves have been very sudden and adjusted very quickly, and that suddenness has always led to a drop in housing demand,” Miller said. “Part of the pullback is being driven by ease of affordability, and part of the pullback is being driven by the psychology of the sudden and aggressive rate hike causing either a shock to monthly payments or a sense of being missed.”
New orders for Lennar homes in its 217 active Texas communities fell from 3,203 in the third quarter of 2021 to 2,577 last quarter.
The builder categorized cities into three tiers based on their current performance level. Dallas, Houston and San Antonio are among the 23 second-tier markets, which include areas where the contractor has had to adjust prices and incentives more than others to regain momentum due to slower traffic and an increase in cancellations come.
“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 regain sales momentum,” said Richard Beckwitt, co-CEO of Lennar.
Lennar placed Austin in the most severe category as one of seven markets that experienced the most significant weakening and correction.
“While we’re cutting prices and increasing incentives, the demand is still there,” Miller said. “Demand remains quite strong at adjusted prices as buyers still have jobs and down payments and have attractive credit scores and are able to qualify.”
KB Home — which builds in 47 markets across the US, including Dallas-Fort Worth — has already seen orders fall since Labor Day due to the recent hike in mortgage rates. The cancellation rate, or the number of deals that went through after a deal was signed, was 35% last quarter, compared to 9% in 2021.
“The primary reason for the cancellation was buyer remorse,” said Jeffrey Mezger, chairman, president and CEO of KB Home. “It wasn’t necessarily that the buyers didn’t qualify. They didn’t feel comfortable pushing the purchase.”
KB Home experienced a backlog of deliveries compared to expectations due to longer construction times and ongoing challenges in the supply chain. The builder completed 3,615 homes in the US last quarter and has an order backlog 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 completed homes in the second quarter that it was unable to deliver because utilities couldn’t get transformers and meters and also faced delays in sourcing switchgear and wiring . He cited Houston as an example, where 77 homes in three communities had been completed and were scheduled to close in the third quarter but were delayed due to a lack of transformers.
“We are focused on what we can control and given the slowdown in launch in most of our markets and our larger size, we are optimistic that we can return to our historical build times, although this will take time,” said McGibney.
KB Home invested just $135 million in new land acquisitions, down 71% from $467 million a year ago. Jeff Kaminski, chief financial officer, said the company is shifting to a more selective land investment strategy “in response to declining housing market conditions and our ability to develop already controlled properties to fuel future and new community openings.”
In addition, the Company relinquished approximately 8,800 previously controlled properties during the quarter. In some cases, land sellers were unwilling to lower 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’re doing everything we can to keep those positions, but if it doesn’t make sense, we’re ready to go,” he said.
Lennar also left 10,000 home sites in the last quarter alone. Lennar Corp. co-CEO Jonathan Jaffe said the company focused during the quarter on “re-evaluating every land deal in our pipeline.”
Arlington-based DR Horton reported a sharp fall in second-quarter demand in July. Pennsylvania’s Toll Brothers, the largest US luxury manufacturer, also said in August that it lowered its sales forecast for the fiscal year and increased incentives to buy.
Ben Caballero, founder and CEO of Dallas-based HomesUSA.com, is a real estate agent who lists homes on real estate associations’ multiple listing services on behalf of builders. His firm saw a huge increase in deals from builders forced to publicly list homes after cancellations began to spike earlier in the year.
Caballero said one sign of slowing demand is that not only are homebuilders offering various incentives for buyers, but they’ve also increased commissions for real estate agents.
“They think if they give a broker a $5,000 or $10,000 bonus, the broker will bring their client to them and not to anyone else,” he said.