“After paying down $575 million of maturing senior debt without replacement, we ended the quarter with $1.3 billion of cash, nothing drawn on our revolver and a 15% debt to total capitalization ratio as compared to 21.2% last year,” Stuart Miller, executive chairman, said during last week’s earnings call. “As a matter of careful capital allocation this quarter, given current market conditions, we chose not to repurchase stock in favor of early retirement of debt. As we’ve continued to drive strong closings and performance, we are well prepared to handle the current market conditions. In addition to the well-documented supply chain constraints and limited workforce slowing production, housing has now been considerably impacted by the more than doubling of mortgage rates over the past months and, therefore, the doubling of monthly payment costs and reduction of housing affordability.”
The Fed’s attempts to tame inflation by tinkering with interest rates has been especially impactful: “The housing market has continued to weaken as expected in response to the Fed’s too-late but now very rapid and aggressive reaction to inflation,” Miller said. “Homebuilding 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. The market is now adjusting. The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand.”
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While homebuilders have previously benefited from higher home prices amid soaring values, the interest rate spikes have spooked many consumers from the housing market. Many have now adopted a wait-and-see stance as they wait out the Fed’s machinations toward a more stable market. “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 a monthly payments figure shock or a sense of having missed the boat,” Miller explained. “The Fed chair’s additional increase of 75 basis points of the Fed funds rate, together with an articulated determination to do more, suggests that even more challenges lie ahead. While demand has cooled at a once high pricing level, demand for shelter still exists where price intersects with current interest rates to produce an affordable monthly payment. There is still a housing shortage across the country, especially workforce housing, and household formation has continued to rise.”
As the Fed tinkers with rates to control inflation, Lennar is now left to adjust sales prices to attract consumers: “First, as I said last quarter, we’re going to continue to sell homes, adjust pricing to market conditions and maintain reasonable volume,” Miller told shareholders. “We have discussed over the past years that we have a housing shortage across the country. We will continue to build even as prices adjust in order to fill that shortfall and provide much needed workforce housing. As we have noted many times in the past, whether the market is improving or declining, we employ our dynamic pricing model week by week to price product to current market conditions in order to maximize pricing and margin while we maintain a very carefully and limited inventory level.”
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