A plan for a topsy-turvy new-home selling environment, in 50 words or less, might look and sound like art, science, or alchemy, but here's one way to put it on the eve of a moment-of-truth calendar fourth quarter.

Our sales strategy has been to find the market clearing price for each of our homes on a community-by-community basis as quickly as possible, and price our homes accordingly. This has required a detailed understanding of traffic trends, inventory levels, community and product-specific pricing, financing programs and buyer sentiment."

Rick Beckwitt, co-CEO, Lennar Corp, yesterday spelled out the plan, clearly and succinctly in prepared remarks accompanying Lennar's Q3 2022 earnings discussion with investment analysts and researchers.

[Lennar Q3 earnings]

Between the lines, the job a market leader like Lennar, D.R. Horton, PulteGroup and other top five homebuilders that command large slices of the marketshare pie for new home deliveries in many of their markets boils down to math and mechanics.

Engineer lower price barriers – mark to market – to drive absorption among would-be buyers, ones Lennar executive Chairman Stuart Miller describes as strong demand with a catch: Monthly payment power has fallen prey to America's cost-of-living crisis.

Miller himself notes:

Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down-payments, and have attractive credit scores, and can qualify. With higher rates, prices must be adjusted downward and incentives used to find the market or sales just drop off. Accordingly, we have carefully managed sales price and our pace through the third quarter, exactly as we said we would last quarter. Although our sales are down 12% from last year's levels, we have focused our management's attention on finding pricing levels that attract demand. Each market is different, and as much as it is an art and not a science, our efforts have slightly lagged our goal of matching our sales pace with our start pace, but we feel certain that we will find pricing and accelerate that pace in the near future."

Lennar's price and pace playbook, by design, aims at taking a larger slice of marketshare in markets where, especially now, the size of the pie is shrinking. It's not a playbook other builders necessarily can or will put into action as Lennar will, but it is one that will impact how every other homebuilder – large, medium, and small – will need to play their own game in the months ahead in a volatile, tricky, and uncertain evolving marketplace.

Beckwitt notes that across Lennar's operating areas, nine continue to pace well in the face of growing headwinds, and 22 other markets have responded directly and positively to switches and levers on pricing and incentives, while seven markets – the Philly Metro area, Minnesota, Pensacola, Austin, Reno, Boise and Utah – remain a work-in-progress to find the pricing level and mechanism to kick-start pace at tolerable levels.

Beckwitt adds:

In these markets, we are focused on establishing pricing that generates new gross sales to offset cancellations. This has required us to work in many cases with backlog to prevent cancellations. It has also required a mix of significant base price adjustments, sales incentives and aggressive mortgage buydowns. While we've made progress in these markets, we still need to make some adjustments on a community-by-community basis."

At least two issues of noteworthiness stand out, not just for public homebuilding companies that may be competing with Lennar for sales in those shrinking-pie market universes, but for hundreds of counter-punching privately-held homebuilders, many of whom can ill afford to lose backlog sales to a homebuilder down the street or near-enough by who's taking a whopper of a price cut to clear their inventory.

One is that the pricing floor Lennar sets as it presses the throttle for sales per community per week – whether it's to keep its sales backlog secured amidst rising can rates, or in some cases, to reboot stalling or sputtering sales absorptions – will be a market share grab, and it will be backed by on-the-ground, ready-to-deliver inventory that Lennar will keep feeding into its evenflow machine.

The other has to do with the susceptibility – where interest rates may continue to spool upward, pricing out more aspiring buyers on a monthly payment basis – of more markets moving into the challenged bucket as the effects of the Federal Reserve start to weaken the economy even further.

Lennar doesn't use its term "dynamic pricing" – a holistic operationalized inventory system – for nothing. The dynamics work on two levels – to lower the barriers for would be buyers, and to do it in a way that outmaneuvers rivals by taking share out of each of its operating markets.

Lennar's Miller explains:

Look, it's a mixed bag. There are some builders that are going along with the program that we have in place. There are a lot of others that have different strategies. The smaller builders are reacting a little differently than some of the larger builders. And that's just -- that adds to the choppiness of the market condition.

All I can tell you is that market by market, we know exactly what the competitors are doing. We see the inventory buildups where they're happening. We see the migration to sell to price, hold and wait and ultimately, falling off the cliff and saying reconciliation. Each of these plays out in each market. That's why we emphasize our dynamic pricing model to each of our divisions because that's what keeps us tuned into the competitive field, exactly what's happening and making the judgments that are necessary.

I think Rick said it really well. This is an art, not a science. And we are playing the game in each market that exists by knowing what the competitive field is and reacting to it.

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