America’s homebuyers are facing increasing financial pressure. Homebuilder Lennar (NYSE:LEN) highlighted in its recent earnings call that consumers are struggling with rising prices and seeking ways to reduce the cost of purchasing a home.
“Given the current inflation rates and cost of living, consumers are feeling more distressed and we are seeing more credit challenges,” said Stuart Miller, executive chairman and co-CEO of Lennar, during the company’s second-quarter earnings call. Lennar’s average home sale price was $426,000 this quarter, down from $449,000 in the same period last year. “We’re at a point where there’s a supply shortage, but consumers need incentives or discounts to afford the housing they need,” Miller added.
The housing affordability crisis is driven by the Federal Reserve’s efforts to curb inflation and a persistent supply shortage. The central bank recently signaled a possible interest rate cut later this year, which could influence mortgage rates set by lenders.
“If the Fed cuts rates, we believe it will activate pent-up demand,” Miller said. To attract buyers amid high mortgage rates, Lennar and other homebuilders have offered concessions such as mortgage rate buydowns.
However, these incentives have raised concerns about their impact on profit margins. In the latest quarter, Lennar’s forecasted gross margin for home sales in Q3 was 23%, falling short of the 24% expected by analysts, according to Bloomberg data. This caused Lennar’s stock to drop by up to 5% during Tuesday’s trading.
“We believe the choppy mortgage rate environment that persisted until May required elevated incentives, which will affect Q3 closings,” noted Raymond James analyst Buck Horne in a report.
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