Is largest U.S. home builder pulling back?

Special to The Log

Homebuilding giant Lennar is reportedly looking to sell its real estate lending arm, Rialto Capital, as builders continue to face a stagnant housing market, The Wall Street Journal reported.

Lennar has declined to comment publicly on the recent news reports, but in an investor call last week and in April it did confirm it was considering selling Rialto as part of the company’s strategy of spinning off or selling its subsidiaries. The sale could provide the builder with extra capital to invest in its core business — residential homebuilding.

It was just last year when Lennar became the nation’s largest homebuilder by revenue after it acquired rival CalAtlantic Group. But since then, the market has softened. Builders have “had a tough time opening new communities because land has gotten pretty expensive,” said John Burns, a real estate consultant.

The industry also blames labor shortages, tax laws, and rising lumber and land prices for slowdowns. Lennar and other builders have reported solid earnings in the most recent quarter, but the slowing housing market may also be weighing on investor sentiment.

Borrowing costs also have been increasing, putting pressure on Lennar’s target market. An uptick in bond yields have prompted the 30-year fixed-rate mortgage to climb closer to 5 percent, the highest average in nearly eight years. Lennar offers homes near the middle price of the new-home market, but as lending costs and home prices rise, more of its potential buyers could be priced out. Lennar's average home is priced around $400,000, which means some customers could soon be drawn to lower-priced builders or existing homes.

Lennar executives acknowledge the market is softening but remain upbeat.

“I think there’s a pause,” Stuart Miller, Lennar’s executive chairman, told The Wall Street Journal. “I think there’s a catch-up.”