The housing market’s big challenge: Consumers are feeling 'more distressed’
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America's homebuyers are getting squeezed.
Homebuilder Lennar (LEN) noted on its post-earnings conference call that consumers are under a growing amount of pressure from sticky price increases and looking for ways to bring down the cost of buying a home.
“There's no question that given inflation rates and the cost of living expenses, the consumer is definitely feeling a little bit more distressed. And we are starting to see a little bit more credit challenge as customers come through,” Stuart Miller, executive chairman and co-chief executive officer of Lennar, told investors and analysts on the company's second quarter earnings call Tuesday afternoon.
Lennar's average sales price of homes delivered was $426,000 in the quarter, down from $449,000 during the same period last year.
Read more: Mortgage rates hover around 7% — is this a good time to buy a house?
"We're looking at a moment in time where on the one hand, there is a supply shortage. But on the other hand, the consumer out of the necessity is looking for elements of incentives or discounts to be able to afford ... the housing stock that they need,” Miller said.
The current housing affordability crisis is a result of the Federal Reserve’s tightening campaign to curb inflation, coupled with a chronic lack of supply. The central bank signaled about a week ago that it anticipates one interest rate cut this year. While the Fed doesn’t directly set mortgage rates, the rates offered by lenders tend to follow the agency’s lead.
"If the Fed is actually going to begin to cut rates, we believe the pent-up demand will be activated," Miller said.
Homebuilders like Lennar (LEN) have pulled out all the stops to lure buyers as high mortgage rates keep would-be buyers and sellers on the sidelines. One popular concession, mortgage rate buydowns, has helped builders bring buyers to the closing table.
But analysts and investors have been concerned about the impact of such incentives on profit margins. In the most recent quarter, Lennar's outlook for its gross margin for home sales in Q3 came in at 23%, missing analyst estimates of 24%, per Bloomberg data, and sending Lennar stock down as much as 5% in Tuesday's trading.
“We suspect the likely culprit is the choppy mortgage rate environment that ended in May, which required elevated incentives that will flow through in 3Q closings,” Raymond James analyst Buck Horne wrote in a note.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.