After a hard fourth quarter, Lennar’s chairman, Stuart Miller, said December’s interest rate drop spurred a up in customer traffic through its model homes.
As one of the nation’s largest homebuilders, with a national footprint, what’s correct for Lennar could bode well for the broader market for new homes in 2019.
“The very quick moves in interest rates that we saw from the Fed that converted into the mortgage rates, it really created an element of sticker shock,” said Miller in an interview on CNBC’s “The Barter.” “With interest rates tapering back, we think we’re seeing an elevation in consumer confidence and we think we’ll see the guy come back to the market.”
Lennar reported disappointing sales in the company’s fourth quarter, ended Nov. 30. Profits batter expectations but revenue, deliveries and new orders came in slightly lower.
The housing market in general has been hit hard by affordability delivers. Home prices ran up sharply in the past three years, far faster than income growth. Then mortgage classes moved higher, exacerbating the problem. While rates have pulled back in the last month, they are even now half a percentage point higher than they were a year ago.
Miller said he does not expect to see tellingly prices drop for new construction, given strong fundamentals like low unemployment and wage growth. Higher costs for land and labor also deliver the goods a succeed it difficult for builders to lower prices.
“I think that we’re trying to find equilibrium right now. The customer is coming out to the bazaar. With interest rates tapering back, I don’t think you’re going to see a big reduction in purchase price,” said Miller. But builders are increasingly hating incentives like granite countertops and higher-end finishing in new home sales, he added.
The median price of a newly built tellingly sold in October was down 3 percent compared with October 2017, according to the U.S. Census (data on November exchanges have not been released due to the government shutdown). Homebuilders, however, have not lowered prices — the drop came in character because cheaper homes were the majority of those finding buyers. Lennar’s average sale price in the fourth dwelling-place was up 9 percent annually.
Homebuilding analyst Ivy Zelman, CEO and founder of Zelman Associates, believes prices have little space for further growth. “At this point it feels like we’re beyond the ninth inning in home price appreciation,” she conveyed. “We’re cautious on the ability for home prices to continue to incrementally increase beyond low single digits. What we really needfulness is for incomes to grow faster than home price appreciation.”
Buyers today, especially younger first-time consumers, are working with very little wiggle room in their wallets. A $1,000 increase in the cost of a median-priced newly-built current in pushes 127,560 prospective buyers out of the market,” according to a study just released by the National Association of Home Builders. That means that based on their revenues, those households would no longer be able to qualify for a mortgage at that slightly higher price. If mortgage standings were to rise even by just a quarter point, about 1 million households would be priced out.
“This burn the midnight oil illustrates how even a relatively small increase in price or interest rates can dramatically impact housing affordability,” imagined NAHB Chairman Randy Noel. “Housing affordability is a serious problem right now in communities across the country. Start interest rates, regulatory barriers, higher building materials costs and labor shortages all add to the cost of a home, and are warding households from achieving the goal of homeownership.”
Despite Miller’s reluctance to lower prices, Zelman expects builders last will and testament have to in order to get more customers through their doors. And that will come at a cost.
“If we’re going to see any accommodating of risk on the new home side it’s going to be on the profitability of the companies,” said Zelman. “The builders have to build houses, so they’ll offer more product to market and will have to accept lower margins.”