Buyer remorse, agent bonuses take hold when higher interest rates change home purchases

Some of the nation’s largest home builders are lowering prices, offering discounts and withdrawing land deals as higher mortgage rates in addition to already skyrocketing home prices continue to weigh on buyers’ affordability.

On Thursday, Miami-based Lennar Corp. and Los Angeles-based KB Home both reported increasing profits and revenues year-over-year, but new orders and buyer traffic declined due to higher rates.

Lennar’s profit increased 4% to $ 1.47 billion, but its new orders nationwide fell 12% year-over-year to 4,366 homes. KB Home pocketed $ 255.3 million, 70 percent more than a year earlier, while orders fell 30 percent 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 swift and aggressive reaction to inflation that came too late, adding that the Fed’s use of interest rates to reduce inflation had the desired effect on housing.

“The movements in interest rates have been very sudden and have adjusted very quickly, and that sudden urgency has always led to a decline in real estate demand,” Miller said. “Part of the withdrawal is driven by mere affordability and part of the withdrawal is driven by the psychology of the sudden and aggressive rise in interest rates that causes the shock of the monthly payment sticker or the feeling of having lost the boat.”

8 out of 10 homeowners in Texas have mortgage rates far below today’s level

New orders for Lennar homes in its 217 active Texas communities fell from 3,203 in the third quarter of 2021 to 2,577 in the final quarter.

The builder has classified the cities into three tiers based on their current performance levels. Dallas, Houston and San Antonio are among the 23 tier two markets, which includes areas where the manufacturer has had to adjust prices and incentives more than others to regain momentum due to slower traffic and increased cancellations.

“While inventory is limited in each of these markets, we have had to offer more aggressive funding programs, base price cuts and / or greater incentives to regain sales momentum,” said Richard Beckwitt, Lennar’s co-chief executive officer.

Lennar placed Austin in the tougher category as one of seven markets that saw the most significant softening and correction.

“As we lower prices and raise incentives, the demand is still there,” Miller said. “Demand remains reasonably strong at appropriate prices as buyers still have jobs, down payments and attractive credit scores and can qualify.”

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KB Home, which operates in 47 markets in the United States, including Dallas-Fort Worth, has already seen a weakening in orders due to the most recent mortgage rate hike since Labor Day. failed after the contract was signed, it was 35% in the last quarter compared to 9% in 2021.

“The # 1 reason for the cancellation was buyer’s remorse,” said Jeffrey Mezger, president, president and CEO of KB Home. “It wasn’t necessarily that buyers didn’t qualify. They didn’t feel comfortable going ahead with the purchase. “

KB Home experienced lower deliveries than expected due to longer build times and ongoing supply chain challenges. The builder completed 3,615 homes in the United States in the last quarter and has a backlog of 10,700 homes that it expects to deliver in the next three quarters.

Robert McGibney, chief operating officer of KB Home, said the builder completed the homes it was unable to deliver in the second quarter because utility providers could not obtain transformers and electricity meters, and they also faced delays in delivering. obtaining panels and cables. He used Houston as an example, where there were 77 homes in three communities that were completed and scheduled to close in the third quarter but were postponed due to a lack of transformers.

“We are focused on what we can control and we are optimistic that with the slowdown in most of our markets and our larger scale onset, we can go back to our historic build times, even if it will take some time to catch up. this goal, “said McGibney.

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KB Home invested just $ 135 million in new land acquisitions, down 71% from $ 467 million a year ago. Jeff Kaminski, chief financial officer, said the company is moving towards a more selective land investment strategy “in response to the softening of real estate market conditions and our ability to develop already under control land positions to drive futures and new ones. community openings “.

In addition, the company abandoned approximately 8,800 previously controlled lots in the quarter. In some cases, land sellers were unwilling to cut prices because other developers were waiting in the wings, Mezger said. Other sellers were in price ranges or areas that would not generate sufficient returns.

“We are doing everything to preserve these positions, but if it doesn’t make sense, we are ready to walk,” he said.

Lennar also moved away from 10,000 home sites in the last quarter alone. Jonathan Jaffe, co-chief executive officer of Lennar Corp., said the company focused on “revaluing every land deal in our pipeline” during the quarter.

Arlington-based DR Horton experienced a sharp decline in demand in the second quarter in July. Pennsylvania-based Toll Brothers, the largest luxury builder in the United States, also said in August that it reduced its sales forecast for the fiscal year and increased incentives for buyers.

Ben Caballero, founder and CEO of Dallas-based HomesUSA.com, is a real estate agent who lists homes on real estate association’s multiple listing services on behalf of builders. His company saw a huge influx of business from builders who needed to publicly list homes after cancellations started growing earlier in the year.

Caballero said a sign of declining demand is that in addition to offering various incentives to buyers, builders have increased commissions to real estate agents.

“Their thinking is that if they are giving a realtor $ 5,000 or $ 10,000, then the realtor will take his client to him instead of someone else,” he said.

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