Lennar Corp. highlighted yet another challenge for homebuilders that have been contending with sluggish demand and high mortgage rates: price competition from a growing supply of existing homes.
It's especially notable in Florida and Texas, two of Lennar's largest markets, Chief Executive Officer Stuart Miller said on a call with analysts Thursday.
"When a resale seller cuts price," he said, "they are competing directly for our customer and we respond, which is a meaningful part of the incentive and pricing dynamic."
Resale inventory in the U.S. had been at rock-bottom for years as homeowners clung to loans they had secured when rates were near record lows. That gave homebuilders including Lennar an advantage. Even as borrowing costs rose, the company and its rivals have been able to attract buyers with discounted financing and other sweeteners — a costly effort that has squeezed profit margins.
Lennar focuses on building affordable homes, pitched at buyers who are sensitive to mortgage rates, which now stand at their
Shares of Lennar were little changed at 2:09 p.m. in New York, trading at $78.28. The stock has tumbled 24% this year, the second worst performance in an S&P index of US homebuilders.
Lennar's shares are down almost 24% since the beginning of the year, making it the second worst performer in an S&P index of US homebuilder stocks. The stock was little changed at 1 p.m. New York time Thursday, trading at $78.45.
It has been a rough year for homebuilders, with consumer uncertainty stemming from the war in Iran, plus immigration enforcement and the onslaught of data center construction taking labor away from homebuilding. Another challenge for Lennar is its decision to be a volume seller even if it means sacrificing margins, which have declined since spinning off its land operations last year.
"Base-price cuts, elevated incentives along with higher land-costs, including land banking fees have brought their margins down significantly," Bloomberg Intelligence analyst Drew Reading said.
In the market for existing homes, sellers are more willing to compromise with buyers on price. Some of the biggest discounts are in Florida and Texas, with more than 80% of homes in West Palm Beach, Miami, Austin and San Antonio selling below their original asking price in August, according to Redfin.
For Lennar, almost half of visitors to its sales offices can't immediately qualify for a home, executives said on the call, so price competition becomes especially important. The company has seen its use of incentives become more expensive, but they've been key to winning over buyers.
"Over the past years, the resale market has been on the sidelines," Miller said. "It has just been disengaged because the differential interest rates were so big, that the need to move up, to move on, to move out, to make change has been postponed for long enough to where that resale market is starting to negotiate now."
