The Cost of Buyer Incentives Looms Over Home Builders

Lower-rate loans and other incentives have helped the biggest home builders sell new houses at a decent clip this year, even as stubbornly high mortgage rates weigh on sales of existing homes.

- DENNY JACOB

A drop in profit posted late last Wednesday by Lennar, however, shows how dependence on those incentives comes with a cost that threatens to drag on home builders into the new year amid fading prospects of lower interest rates. Lennar said the average price of each home sold slipped about 2.5% in the latest quarter, denting profit margins.

"The shortfall in margin resulted from increased incentives on homes sold and delivered within the quarter," said Stuart Miller, co-chief executive, on a call with analysts Thursday.

Lennar, which didn't respond to requests for additional comment, has leaned on incentives, such as rate buydowns and other closing cost reductions, at higher levels in 2024 than in the prior year. Sales incentives as a percentage of revenue were 10.1% through the first three quarters of fiscal 2024, up from 8.6% in 2023, according to a securities filing. During the fourth quarter, sales incentives rose to 10.8%.