Lennar flags cooling home demand as hotter interest rates spook buyers

homebuilder Lennar Corp (LEN.N) on Tuesday warned of a downturn in home demand as red-hot prices and surging interest rates push buyers to the sidelines, threatening the industry’s breakneck pace of profit growth.

In the sector’s strongest warning so far, Lennar said any forecast at this point would amount to “guessing”, even though the company preserved its delivery expectations for the full year at about 68,000 homes.

“The Fed’s stated determination to curtail inflation through interest rate increases and quantitative tightening have begun to have the desired effect of slowing sales in some markets and stalling price increases across the country,” Lennar Executive Chairman Stuart Miller said in a statement.

Last week, the U.S. Federal Reserve delivered its biggest interest rate hike since 1994 in a bid to tackle decades-high inflation, while mortgage rates on the most popular type of U.S. home loan marked the sharpest weekly jump in 35 years.

Lennar may have to reduce some home prices to support demand, company executives said in a post-earnings call with analysts.

“LEN’s earnings commentary is likely to be a bellwether for the group,” Barclays analyst Matthew Bouley said in a note.

Profits at U.S. builders such as Lennar and D.R. Horton Inc (DHI.N) are now set to cool off after nearly doubling during the pandemic, when strong demand for homes from people working remotely had driven up prices.

Lennar recorded a single-digit rise in orders for the second consecutive quarter, in another sign of slowdown.

Still, the higher home prices and demand helped it report a second-quarter profit of $1.32 billion, or $4.49 per share, beating analysts’ expectations of $3.96 per share, according to Refinitiv IBES data.

Revenue was $8.36 billion, above expectations of $8.08 billion.

Shares of the company were up 2.3% in afternoon trade.