Buyer’s remorse, agent bonuses take hold as higher interest rates change homebuying
“The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand”
Some of the nation’s largest homebuilders are lowering prices, providing discounts and pulling out of land deals as higher mortgage rates on top of already sky-high home prices continue to take a toll on buyer affordability.
Miami-based Lennar Corp. and Los Angeles-based KB Home on Thursday both reported soaring year-over-year profits and revenue but declines in new orders and slowdowns in buyer traffic due to the higher rates.
Lennar’s profit increased 4% to $1.47 billion, but its new orders nationally decreased 12% year over year to 4,366 homes. KB Home pocketed $255.3 million, 70% more than it did a year prior, while orders were down 30% year over year to 3,137 homes.
Stuart Miller, executive chairman of Lennar Corp., said the housing market weakened as expected in response to the Fed’s rapid and aggressive reaction to inflation that came too late, adding that the Fed’s use of interest rates to curtail inflation had the desired effect on housing.
“The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand,” Miller said. “Part of the pullback is driven by simple affordability, and part of the pullback is driven by the psychology of the sudden and aggressive interest rate hike causing either monthly payment sticker shock or a sense of having missed the boat.”
New orders for Lennar homes at its 217 active Texas communities fell from 3,203 in third-quarter 2021 to 2,577 last quarter.
The builder categorized cities in three tiers based on their levels of current performance. Dallas, Houston and San Antonio are among 23 markets in the second tier, which includes areas where the builder has had to adjust prices and incentives more than in others to regain momentum due to slower traffic and a rise in cancellations.
“While inventory is limited in each of these markets, we’ve had to offer more aggressive financing programs, base price reductions and/or increased incentives to regain sales momentum,” said Richard Beckwitt, co-chief executive officer of Lennar.
Lennar put Austin in the most severe category as one of seven markets that saw the most significant softening and correction.
“As we bring prices down and incentives up, demand is still there,” Miller said. “Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down payments and have attractive credit scores and can qualify.”
KB Home — which builds in 47 markets throughout the U.S., including Dallas-Fort Worth — has already seen a softening in orders due to the most recent spike in mortgage rates since Labor Day. Its cancellation rate, or the amount of deals that fell through after the contract was signed, was 35% last quarter compared to 9% in 2021.
“The No. 1 reason for cancellation was buyer’s remorse,” said Jeffrey Mezger, chairman, president and CEO of KB Home. “It was not necessarily that the buyers did not qualify. They did not feel comfortable moving ahead with the purchase.”
KB Home saw a shortfall in deliveries from expectations due to longer build times and continued supply-chain challenges. The builder completed 3,615 homes in the U.S. last quarter and has a backlog of 10,700 homes it expects to deliver over the next three quarters.
Robert McGibney, chief operating officer of KB Home, said the builder completed homes it could not deliver in the second quarter because utility providers could not get transformers and electric meters, and also faced delays in obtaining switchgear and wire. He used Houston as an example, where there were 77 homes across three communities that were completed and scheduled to close in the third quarter but were postponed due to the lack of transformers.
“We are focused on what we can control, and we are optimistic that with starts slowing in most of our markets and our greater scale, we can transition back to our historical build times, although this will take time to achieve,” McGibney said.
KB Home invested only $135 million in new land acquisitions, a 71% decline from $467 million a year prior. Jeff Kaminski, chief financial officer, said the company is pivoting toward a more selective land investment strategy “in response to softening housing market conditions and our ability to develop land positions already under control to drive future and new community openings.”
Additionally, the company abandoned roughly 8,800 previously controlled lots in the quarter. In some cases, land sellers were not willing to reduce 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 and anything to preserve these positions, but if it doesn’t make sense, we are prepared to walk,” he said.
Lennar also walked away from 10,000 home sites last quarter alone. Jonathan Jaffe, co-chief executive officer of Lennar Corp., said the company focused on “reassessing every land deal in our pipeline” through the quarter.
Arlington-based D.R. Horton in July reported a sharp drop in demand in the second quarter. Pennsylvania-based Toll Brothers, the largest U.S. luxury builder, also said in August that it cut its sales forecast for the fiscal year and increased buyer incentives.
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 influx in business from builders needing to publicly list homes after cancellations began spiking earlier in the year.
Caballero said a sign of waning demand is that in addition to offering various incentives to buyers, builders have upped commissions to real estate agents.
“Their thinking is that if they are bonusing a Realtor $5,000 or $10,000, then the Realtor is going to bring their customer to them as opposed to somebody else,” he said.
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