Rising Costs and Inflation Make Homebuying Difficult

Home Buyers

American homebuyers are facing challenges due to the rising costs in the housing market.

Lennar Corporation (NYSE:LEN), a major homebuilder, noted during its post-earnings conference call that consumers are experiencing financial difficulties due to continuous price increases and are seeking ways to reduce their home buying costs.

“Consumers are feeling more distressed due to inflation and rising living expenses. We’re also seeing more credit issues among potential buyers,” said Stuart Miller, Executive Chairman and Co-Chief Executive Officer of Lennar, during the company’s second-quarter earnings call on Tuesday afternoon. Lennar’s average home sales price in the quarter was $426,000, a decrease from $449,000 in the same period last year.

“We’re in a situation where there’s a supply shortage, but consumers are looking for incentives or discounts out of necessity to afford the homes they need,” Miller added.

The current affordability crisis in the housing market is attributed to the Federal Reserve’s actions to combat inflation, coupled with a chronic shortage of housing supply. The central bank recently indicated that it expects to cut interest rates once this year. Although the Fed does not directly control mortgage rates, lenders’ rates generally follow the Fed’s trends.

“If the Fed starts cutting rates, we anticipate pent-up demand will be triggered,” Miller remarked.

Homebuilders like Lennar have been offering various incentives to attract buyers, despite high mortgage rates deterring both buyers and sellers. One common incentive, mortgage rate buydowns, has been successful in encouraging buyers to complete purchases.

However, analysts and investors are concerned about the impact of these incentives on profit margins. In the latest quarter, Lennar projected its gross margin for home sales in Q3 at 23%, below analysts’ expectations of 24%, according to Bloomberg data, leading to a decline of as much as 5% in Lennar’s stock on Tuesday’s trading.

“We believe the fluctuating mortgage rate environment that persisted until May likely necessitated higher incentives, which will impact Q3 closings,” noted Raymond James analyst Buck Horne in a report.