Home sales are taking a dip as mortgage rates rise. Here: Lennar townhomes under construction in this aerial photograph in San Diego in 2020.
Higher mortgage rates have cut into home sales at a national level—but, as the saying goes, all real estate is local.
the nation’s second-largest builder by market capitalization, on Thursday listed the housing markets that are holding up best—and worst.
The home builder was one of the two to report earnings this week for the quarter ended Aug. 31.
(ticker: LEN) and the smaller builder
“Home building finds itself once again at the forefront of all that is happening in the economy, and the Fed’s use of its interest rate tool to curtail inflation is certainly having the desired effect on the for-sale housing market,” Stuart Miller, Lennar’s executive chairman, said on the company’s third-quarter earnings call.
Lennar is adjusting prices and offering incentives to drive traffic, executives said. The company’s new net order sales price was 9% lower than the second quarter, but 1% higher than the year prior, co-CEO Richard Beckwitt said on the call. During the third quarter, new order incentives increased to 6% in August from 2.3% in June, he added.
“As we bring prices down and incentives up, demand is still there,” Miller said. “These fundamentals give us assurance that while there is short- and medium-term reconciliation, the long-term prospects for housing continue to be strong.”
Not every housing market necessitated the same tough love. Beckwitt sorted housing markets into three categories: those that have continued to perform well, those where sales momentum picked up after the company adjusted prices or incentives, and those that could require further price adjustments to drive sales.
Sales remained strong in nine areas, Beckwitt said. They include New Jersey; Maryland; Virginia; Charlotte, N.C.; Indianapolis; San Diego, Calif.; and three markets of Florida: the southwest, the southeast, and the area around Palm Beach.
“These markets are benefiting from extremely low inventory, and many are benefiting from a strong local economy, employment growth and in-migration,” Beckwitt said, adding that Lennar offered mortgage buy-down programs and some incentives to maintain the sales pace. “Some communities in these markets have required targeted price adjustments on a limited basis,” he added.
The bulk of locales fell into the second category. The company said it “made more significant adjustments to regain sales momentum” in more than 20 markets. Among them were some of the pandemic housing boom’s hottest markets, such as Phoenix, Dallas, and Tampa, Fla.
Other areas in this category included Orlando, Fla.; Jacksonville, Fla.; the coastal Carolinas; Atlanta; Chicago; Nashville; Raleigh, N.C; Houston; San Antonio; Tucson, Ariz.; Las Vegas; Colorado; Seattle; and several parts of California, including as the coast, the Inland Empire, the Bay Area, the Central Valley, and Sacramento.
Traffic has slowed in each of these markets, and cancellations have increased, Beckwitt said, adding that the company offered buyer perks such as “aggressive” financing programs, price reductions, and increased incentives to drive sales.
The company says buyer pullback had been strongest in seven markets, including Boise, Idaho, where prices skyrocketed earlier in the pandemic amid lower rates and the work-from-home housing boom. “While the drivers and individual dynamics of these markets are varied somewhat, traffic has slowed significantly,” Beckwitt said. Other markets in this category include Philadelphia; Pensacola, Fla.; Austin; Reno, Nev.; Minnesota; and Utah.
Many buyers in those markets “need to be convinced that now is the time to buy,” Beckwitt said. “There is fear that sales prices have not hit bottom, which has led to an elevated level of cancellations.”
Lennar isn’t alone in sweetening deals for prospective buyers. More than half of builders surveyed by the National Association of Home Builders in September said that they offered incentives, such as mortgage rate buy-downs and price reductions, to help drive sales, the trade group said earlier this week.
While builders court buyers, existing-home sellers have pulled back. The inventory of existing homes for sale at the end of August fell for the first time since January, according to National Association of Realtors data released Wednesday. Sellers “do not want to give up that 3% mortgage rate,” the association’s chief economist Lawrence Yun said at the time.
Write to Shaina Mishkin at firstname.lastname@example.org