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Builder Lennar Corp. (LEN) is quietly offering new home buyers a mortgage rate as low as 3.25% for five years--one of the lowest rates ever dangled by a public home builder--an early sign attention-grabbing specials are coming back.
So far, Lennar, which recently slashed some prices by more than 15% in Las Vegas, appears to be an early mover: Most competitors have avoided price cuts and eye-popping deals as they wait out the worst housing crash in decades.
But they could soon change their minds. In recent months, home builders ramped up construction to have houses finished for buyers tapping the home-buyer tax credit that expired April 30. Some builders overestimated buyers' appetite, though it is unclear by how much. Companies will know more after the tax-credit closing deadline expires on June 30, though that may be extended. The U.S. Senate voted late Wednesday to approve an extension of the tax credit, though the House hasn't yet weighed in.
Miami-based Lennar confirmed it is offering the rate, which isn't being widely advertised, but did not comment further.
The offer, crafted to move standing inventory nationwide, requires closing by June 30. After five years, the rate increases by up to 1% a year to a maximum of 8.25%--though it won't necessarily get that high. It appears that for to-be-built homes, the mortgage rate is 3.99%, fixed for 30 years. Both offers are below current national rates, which are below 5%.
For builders, any excess inventory right now is a risk. Following the credit's end, traffic from potential buyers has slowed dramatically, indicating the government's offer pulled demand forward.
Meanwhile, recent data show a weakening sector. Home construction plunged in May, while the National Association of Home Builders trade group this week reported that its builder-confidence gauge fell five points to 17 out of 100 in June.
As a result, builders might have to boost incentives to jumpstart sales. But such a move would hurt their bottom line just as they're near profitability. Price cuts clearly mean less revenue. But even mortgage-rate specials carry a cost: To offer lower mortgage rates, builders make upfront cash payments to mortgage companies, a process known as a "buy down." On a $200,000 loan, it typically costs about $8,000 to buy down the mortgage rate by a full percentage point on a 30-year mortgage.
Industry experts have long said Lennar's marketing is worth watching. During the downturn, it was one of the first builders to cut prices and offer specials. Others quickly followed, sparking fierce competition that drove prices even lower. In perhaps the best-known blowout bonanza, Hovnanian Enterprises Inc. (HOV) in 2007 offered the 72-hour "Deal of the Century," shaving six figures off some home prices.
One of Lennar's more creative deals involved offering vouchers for a Ford Motor Co. (F) Mustang in some Florida communities.
-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; email@example.com