Lennar Homes Chairman: Rising prices and interest rates are a 'one-two punch' to homebuyers
By Chloe Aiello @ CNBC
October 12, 2018

Rising prices and accelerating interest rates are a “one-two punch” to homebuyers, Lennar Executive Chairman Stuart Miller told CNBC on Thursday.

“The combination of both higher prices … together with the acceleration and adjustment of interest rates — that is a one-two punch to what our buyers purchase, which is basically [a] monthly payment,” Miller told CNBC’s Diana Olick during a “Power Lunch”interview.

“Higher prices mean higher down payment and higher monthly payment. And higher interest rates, of course, accelerate that monthly payment as well,” he added.

Key Takeaways

  • Rising prices and accelerating interest rates are a "one-two punch" to homebuyers, Lennar Executive Chairman Stuart Miller says.
  • Homebuilder stocks have taken a direct hit from the rising interest rates rattling financial markets this month, but Miller says builders could see a boost from pent up demand and wealthier buyers.
  • With the exception of lumber, materials costs are rising due to tariffs. Labor costs are rising, too, Miller noted.

Homebuilder stocks have taken a direct hit from the rising interest rates rattling financial markets this month.

The iShares Home Construction exchange-traded fund, which includes homebuilding products and homebuilders, is down 27 percent since January. The SPDR S&P Homebuilder ETF is down 21 percent, also in a bear market. Both funds have fallen more than 3 percent in September.

Lennar shares are down about 31 percent year to date.

“We certainly believe it’s an overreaction. Not one we didn’t anticipate, as well, because the stock market does react to the homebuilders when interest rates start going up,” Miller said, arguing that that value is unhinged from the underlying fundamentals of the company.

But rising interest rates might especially hurt high-end homebuilders, like Lennar, as prospective buyers may have to adjust their target pricing lower to accommodate higher rates.

“The impact of interest rates rising, and especially at a very quick pace, is having a palpable impact on our customers and customers across the country,” Miller said.

With the exception of lumber, materials costs are rising due to tariffs. Labor costs are rising, too, Miller noted.

“It exacerbates what is the affordable housing crisis we feel across the country right now. Very hard to deliver affordable housing with costs going up,” Miller said.

But with a labor shortage comes higher wages, and with higher wages come wealthier buyers. Although there is a ceiling as to how much Lennar or rival homemakers can charge on homes, Miller said they can benefit from “pent-up demand that’s going to come to market even while prices are going up.” He also emphasized Lennar’s size and scale in local markets as a strength.

Concerning whether the Fed is making the right choice in hiking interest rates, Miller was candid.

“Of course, we respect, like many, the independence of the Fed, but at the same time, would we like them to slow down the pace? Of course, we would,” he said.

Originally published on CNBC