Builders Pushing Own Lenders
Builders such as Lennar are leaning on their financing units to boost orders as rising mortgage rates sap customer buying power, a practice that may become more widespread after the biggest sales drop in three years. Lennar signage hangs outside a home in Clay County, Fla., in 2007. Illustrates MORTGAGES (category f) by Kathleen M. Howley and John Gittelsohn © 2013, Bloomberg News. Moved Thursday, Sept. 5, 2013. (MUST CREDIT: Bloomberg News photo by Oscar Sosa).
Greg and Julie Corbin were shopping for a home in May when interest rates spiked and shrank their budget. Lennar Corp. persuaded them to pay full price anyway.
The Miami-based builder volunteered to cover their loan costs and cut half a percentage point off their interest rate if the couple used its in-house lending unit, Universal American Mortgage Co. The Corbins bought their four-bedroom home in a suburb of Tampa, Fla., last month for $213,000, about 50 percent more than the area’s median price, with loan perks they estimated were worth at least $10,000.
“You just can’t beat a deal like that,” said Greg Corbin, 40, taking a break from moving boxes into his new house last week. “It made our decision easy.”
Builders including Lennar and PulteGroup Inc. that typically throw in concessions such as kitchen upgrades are also leaning on their financing units to boost orders as rising mortgage rates sap customer buying power. Those incentives may become more widespread as housing companies seek to avoid cutting prices after the biggest sales drop in three years and a 27 percent stock decline from a May peak.
“They’re almost certainly going to have to report a drop in home sales for the quarter, and their shares have taken a pounding in the last few months because of that,” said Christopher Low, chief economist at FTN Financial in New York. “They have a sense of urgency because if they have to report prices fell too, it will be a disaster.”
The number of contracts signed to sell new homes dropped 13 percent in July from June, according to the Commerce Department. The median price gained at an 8.3 percent pace from a year earlier, slower than the prior month’s 11 percent increase and less than half of April’s 18 percent jump.
Homebuilders had been some of the biggest winners from the Federal Reserve’s efforts to push down borrowing costs to record lows, with a Bloomberg stock index of 14 companies more than doubling in 2012. The gauge has slumped as 30-year mortgage rates jumped from a near-record low of 3.35 percent in May to 4.51 percent last week, according to Freddie Mac.
This year’s biggest losers have been M/I Homes Inc., Hovnanian Enterprises Inc. and MDC Holdings Inc., which sell to first-time buyers who have the most difficulty qualifying for home loans.
“We got very spoiled by 3.5 percent mortgage rates,” Ara Hovnanian, chief executive of New Jersey’s biggest homebuilder, said during an Aug. 30 interview with Bloomberg Television. July’s decline in new-home contracts stemmed from buyers taking “a little breather,” he said.
Publicly traded builders sell about one in four new U.S. homes and have more access to capital and flexibility to offer closing cost incentives than smaller competitors, said Stephen Kim, a Barclays Plc analyst who downgraded his outlook for builders in July.
“The next shoe to drop is going to be incentives,” Kim said in a telephone interview from New York. “That’s about the farthest thing from massive price appreciation as you can get.”
The median price of a new single-family home in the U.S. fell in the last three months to $257,200 after hitting an all- time high of $279,300 in April. That peak was 6.4 percent higher than the former record in 2007 and is up from $204,200 during the depths of the housing crisis in October 2010.
Prices bounced back faster than volume. July’s annualized new-home sales pace of 394,000 was 72 percent below mid-2005’s record 1.39 million, according to Commerce Department data. Existing single-family homes sold at a pace of 4.76 million in July, 25 percent below the all-time high in September 2005.
Lennar’s incentives averaged $20,200 per home in the quarter ended May 31, down by $9,600 from a year earlier, Chief Financial Officer Bruce Gross said on a June conference call. Interest rates were falling during most of that period. Allison Bober, a Lennar spokeswoman, declined to comment on recent concessions because the company is reporting third-quarter results this month.
PulteGroup, the largest U.S. builder by market value, is offering as much as $3,500 in closing cost assistance to buyers at communities in Las Vegas; Jacksonville, Fla.; and Tigard, Ore., who finance through Pulte Mortgage LLC, according to its website.
A spokesman said this isn’t a new program as PulteGroup has offered assistance with closing costs for years.
“For the consumer, using Pulte Mortgage helps create a simpler buying experience where they can be more confident the mortgage will be ready when home construction is complete,” Jim Zeumer, a spokesman for the Bloomfield Hills, Mich.-based builder, said in an email. “Few things are more frustrating to the homebuyer than having to push back a closing by a few days or weeks because the outside lender wasn’t ready with the mortgage.”
Incentives offered by homebuilders may include paying down interest rates, waiving closing costs, and prepaying mortgage insurance. Closing costs on a $225,000 mortgage could total about $5,600 depending on where the borrower lives, according to an estimate by Fair Isaac Corp., a credit analytics company.
Cutting interest rates allows borrowers to qualify for bigger loans by reducing the size of their monthly payments. Assuming a 10 percent down payment, someone eligible to buy a $300,000 house at the beginning of May, when the average rate for a 30-year fixed mortgage was 3.35 percent, would have to start shopping for homes priced at about $260,000 after rates rose to 4.48 percent last month.
Money that isn’t spent on closing costs can go toward a bigger down payment or be shown to lenders as cash on hand to improve a buyer’s creditworthiness. When a builder prepays a mortgage-insurance policy it reduces monthly bills used to gauge a borrower’s debt load.
“We took all the money we would have spent on closing costs and put it toward our down payment,” said Greg Corbin, who bought the Lennar house with a two-car garage. “It would have been awesome to get the 3.5 percent rate in April, but getting all our mortgage costs covered takes a lot of the sting out of missing it.”
Homebuilders can’t offer loans with teaser rates or the types of toxic mortgages that became common during the housing bubble years, according to Greg McBride, senior financial analyst for Bankrate.com. Usually, they must meet rules for conforming mortgages set by Fannie Mae, Freddie Mac and Ginnie Mae because the goal is to sell a loan as soon as possible to the government agencies, he said. For jumbos, or loans with balances above the conforming cap, they have to adhere to the requirement set by banks that will buy the loans.
“They want to sell this house, but they don’t want to be stuck holding this note,” McBride said.
D.R. Horton Inc., the largest U.S. builder by volume, said rising interest rates began to dent its order growth late in the quarter that ended June 30.
“Frankly a lot of buyers were counting on trying to pick the low in the pricing and the low in the interest rates, and they’re a little bit shocked or disturbed by the fact that rates have moved up from where they were,” Donald Tomnitz, CEO of the Fort Worth, Texas-based company, said during a July 25 conference call.
As of the end of July, D.R. Horton hadn’t cut prices or increased incentives because there was still more demand than supply, Tomnitz said.
“There’s a shortage of new homes out there,” he said.
The U.S. inventory of unsold new homes rose in July to a 5.2-month supply from 4.3 months in June. A six-month supply is considered a balanced market.
In August, some builders in California and Arizona raised buyer incentives, halted price increases and began offering higher commissions to real estate agents who close sales, according to Alex Barron, an analyst at the Housing Research Center LLC in El Paso, Texas.
“Until now, the official word has mostly been that interest rates don’t affect us,” Barron said in a telephone interview.
Higher mortgage rates are more likely to slow sales to first-time buyers than people purchasing a move-up home, according to Kim, the Barclays analyst.
While Toll Brothers Inc. was able to raise prices an average $18,000 in the three months through July 31, it also offered buyers the option to lock in current rates, according to Don Salmon, president of TBI Mortgage Co., the lending arm of the largest U.S. luxury-home builder. The locks last as long as 12 months on conforming loans. Rate locks were only 6 months on jumbo loans, which accounted for about 17 percent of the Horsham, Pennsylvania-based company’s sales, Salmon said during an Aug. 21 conference call.
Builders shy away from discussing incentives and often don’t advertise them because it gives away their negotiating position for future sales, said Dawn Rae, a broker with Florida Buyers’ Advocate in St. Petersburg. Once buyers report they got $10,000 in concessions, other shoppers will demand it too, said Rae, who negotiated the Corbins’s purchase.
Mortgage incentives create bigger savings for buyers than getting upgrades like granite countertops or landscaping, according to Rae. Sometimes you can get both, she said. The Corbins’s home already came with kitchen upgrades, landscaping, and even blinds on the windows. They also got Lennar to include automatic garage-door openers.
“It’s a good time to be negotiating with builders because they’re eager,” Rae said. “They probably won’t budge on the price of the home, but everything else is open to discussion.”