It was called "running the gauntlet."
This form of punishment saw the victim being forced to run between two rows of very unfriendly people who were armed with clubs and bad intentions.
While the physical abuse is a thing of the past--we hope--Stuart Miller, executive chairman and co-chief executive officer of Lennar (LEN) , sees a modern-day variation on this practice playing out in the housing market.
"While interest rates have continued to move higher and lower as the Fed continues to seek economic data indicating that inflation has been controlled, the consumer has been navigating an affordability gauntlet," Miller said during the homebuilding company's first-quarter earnings call on March 13.
The challenge isn't likely to get any easier, based on what will likely happen to interest rates when the Fed meets on March 20.
Lennar Homes
CEO cites 'chronic housing shortage'
Miller told analysts that the new homebuilders have worked out various incentive structures ranging from interest rate buydowns to closing cost pickups to price reductions--"all designed to meet the purchaser at the intersection of need and affordability."
"Those incentives have increased and decreased as interest rates have moved up and down," he said. "Homebuilders have been uniquely able to capture demand by using these incentives to unlock the affordability constraint and enable purchasers to transact."
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Lennar reported first-quarter earnings of $2.57 per share, ahead of the FactSet consensus of $2.21 per share, and up from $2.06 a year earlier.
Revenue totaled $7.312 billion compared with FactSet’s call for $7.39 billion, up from $6.49 billion a year ago.
The company delivered 16,798 homes in the quarter, a 23% jump from a year earlier. Lennar also expects second-quarter home deliveries to be between 19,000 and 19,500.
The 7% interest rate on 30-year fixed mortgages and the low availability of existing homes has driven housing prices higher, pushing many potential buyers out of the market, according to Reuters.
To counter this, Lennar cut average base home prices to $413,000 in the quarter, compared with a selling price of $448,000 per home a year earlier.
Miller said demand for housing was limited by the chronic housing shortage, which " is particularly problematic for working-class families and their ability to find affordable or attainable supply."
"Along with the supply shortage, the additional limiting factor continues to center around affordability, driven by the impact of higher interest rates and stubborn inflation," he said.
He noted that with higher interest rates, affordability continues to be tested as higher monthly payments make qualifying for a loan increasingly difficult.
CEO says inflation makes down payments difficult
"At the same time, inflationary pressures have driven traditional cost of living expenses higher over the past two years," he said, "which has made saving for a down payment increasingly difficult. Higher prices have also started to lead to increased personal and credit card debt as families stretched to pay their bills."
"We've started to see early evidence of debt delinquency showing up and derailing some mortgage applications," Miller added.
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The U.S. Federal Reserve is scheduled to begin its two-day meeting on Wednesday and investors are watching to see what the Fed will do regarding interest rates.
Although the Fed doesn’t set mortgage rates outright, its decisions affect how rates move. Interest rate cuts from the Fed typically put downward pressure on mortgage rates.
February housing starts, which measure new residential construction, came in hotter than expected on Tuesday, reaching 1.518 million, up 1.9% from the upwardly revised January figure and 2.4% higher than last year.
Analyst tweaks Lennar's stock price target
Lennar and its competitors experienced a sell-off on March 14.
Wedbush analyst Jay McCanless said several factors, including a stronger-than-expected producer price index report, caused the drop. Higher inflation could mean rate cuts remain unlikely in the short term.
The analyst, who raised the firm's price target on Lennar to $144 from $130, has a neutral rating on the stock. His tepid rating is due to Lennar's second-quarter guidance being below the company's and Wall Street's consensus gross margin forecast. He also cites comments on the company's earnings call regarding mortgage rates remaining near current levels as a headwind.
McCanless also said Lennar's view that inflation may not have peaked potentially contributed to the sell-off because it means the affordability gauntlet will remain daunting.
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