After a tough fourth quarter, Lennar’s chairman Stuart Miller said December’s interest rate drop spurred a surge in customer traffic through their model homes.
As one of the nation’s largest home builders, with a national footprint, what’s good 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 translated into the mortgage rates, it really created an element of sticker shock,” said Miller in an interview on CNBC’s The Exchange. “With interest rates tapering back, we think we’re seeing an elevation in consumer confidence and we think we’ll see the customer come back to the market.”
Lennar reported disappointing sales in the company’s fourth quarter, ending November 30. Profits beat expectations but revenue, deliveries and new orders came in slightly lower.
The housing market in general has been hit hard by affordability issues. Home prices ran up sharply in the past three years, far faster than income growth. Then mortgage rates moved higher, exacerbating the problem. While rates have pulled back in the last month, they are still half a percentage point higher than they were a year ago.
Miller said he does not expect to see home prices drop for new construction, given strong fundamentals like low unemployment and wage growth. Higher costs for land and labor also make 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 market. 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 using incentives like granite counter tops and higher-end finishing in new home sales, he added.
The median price of a newly built home sold in October was down 3 percent compared with October 2017, according to the U.S. Census (data on November sales have not been released due to the government shutdown). Homebuilders, however, have not lowered prices – the drop came in part because cheaper homes were majority of those finding buyers. Lennar’s average sale price in the fourth quarter was up 9 percent annually.
Homebuilding analyst Ivy Zelman, CEO and founder of Zelman Associates believes prices have little room for further growth. “At this point it feels like we’re beyond the ninth inning in home price appreciation,” she said. “We’re cautious on the ability for home prices to continue to incrementally increase beyond low single digits. What we really need is for incomes to grow faster than home price appreciation.”
Buyers today, especially younger first-time buyers, are working with very little wiggle room in their wallets. A $1,000 increase in the cost of a median-priced newly-built home 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 incomes, those households would no longer be able to qualify for a mortgage at that slightly higher price. If mortgage rates were to rise even by just a quarter-point, about one million households would be priced out.
“This study illustrates how even a relatively small increase in price or interest rates can dramatically impact housing affordability,” said NAHB Chairman Randy Noel. “Housing affordability is a serious problem right now in communities across the country. Rising interest rates, regulatory barriers, higher building materials costs and labor shortages all add to the cost of a home, and are preventing households from achieving the goal of homeownership.”
Despite Miller’s reluctance to lower prices, Zelman expects builders will 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 kind 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 bring more product to market and will have to accept lower margins.”