Co-Chief Executive Officer and Co-President at Lennar
Thanks, Stuart. As you can tell from Stuart's opening comments, the housing market has been reacting to a significant increase in mortgage rates, increased sales prices, continued inflation and the impact of a declining stock market. These changes accelerated during the quarter with many marking the most pronounced impacts. With this in mind, I would like to focus my comments today on the monthly changes during our quarter, current sales environment in our markets and our strategic and operating focus as a company.
During the second quarter, our new sales orders increased 4% from the prior year on flat year-over-year community count. Sales pace per community increased from 4.8 to 5 sales per month. We continue to sell our homes later in the construction cycle to maximize prices and offset potential cost increases.
During the quarter, we saw year-over-year increases in new sales orders in each month of the quarter, with a variance of less than 125 sales orders between each monthly total. Our sales incentives on new orders during the second quarter were down 10 basis points year-over-year. However, the percentage did increase sequentially each month during the quarter, with many new sales order incentives totaling 1.6% of the gross sales price of the home.
While the sales percentage in May marked the high point during the quarter, it was still relatively low from a historical perspective. In fact, sales order incentives in May were slightly lower than the average new sales ordering incentive for the latest 12 months.
Our cancellation rate during the quarter totaled 11.8%, which increased sequentially during the quarter, but was significantly below our long-term historical average. We ended the quarter with only approximately 250 completed homes that were installed across our national footprint, putting us in a great position in a soft new sales environment. So far in June, new orders, traffic, sales incentives and cancellations have worsened in many of our markets due to a rapid spike in mortgage rates and headwinds from negative economic headlines. Many markets have also slowed as we've entered a seasonably slower part of the year.
I'd now like to give you some color on our markets across the country. They really fall into 3 categories: one, markets reflecting no and minimal impacts; two, markets reflecting modest impacts; and three, markets reflecting more significant impacts.
During the second quarter and so far in June, we had 19 markets that continue to perform well. These include our 6 Florida markets, New Jersey, Maryland, Charlotte, Indianapolis, Chicago, Dallas, Houston, San Antonio, Phoenix, San Diego, Orange County and the Inland Empire. All of these markets are benefiting from extremely low inventory, and many are benefiting from strong local economy, employment growth and in migration.
While these markets have continued to be strong, our sales pace and pricing power has started to flatten or has flattened in each of these markets. To maintain sales momentum, we have offered mortgage buydown programs and normalized market incentives.
Our Category 2 market, which reflects a modest softening in pricing and a slowdown in the markets includes 10 markets. These include Atlanta, Colorado, Charleston, Myrtle Beach, Nashville, Philadelphia, Virginia, the Bay Area, Reno and Salt Lake City. In each of these markets, traffic has slowed, and we've seen an uptick in cancellation rates. While inventory is limited in each of these markets, we've had to offer more aggressive financing programs and targeted price reductions to reduce our sales base -- to keep our sales base in line with our production schedule.
Selectively reducing the sales price to solve for a mortgage payment that works for our buyers has worked well in these markets. Notwithstanding these price increases, net pricing remains higher than year ago periods.
Our Category 3 markets, which reflect the more significant market softening and correction includes 7 markets. These include Raleigh, Minnesota, Austin, Los Angeles, the Central Valley, Sacramento and Seattle. I'd like to spend a few minutes discussing these markets and what we're doing strategically from a sales point.
Raleigh was an extremely strong market in the second quarter but softened significantly at the beginning of June. This stems from a combination of higher mortgage rates, steep price increases over the last 2 years, and some job concerns in the Texas. We believe pricing pressure will continue until the market resets and we've been reducing pricing and offering aggressive mortgage buydown program. Our pricing adjustments have started to take hold and sales activity has begun to stabilized. On a positive note, cancellation rates had not been a problem, inventory is limited and our net new order pricing is still up on a year-over-year basis. As a result, we have room for any needed future pricing adjustments.
The Minnesota market has been very challenging. Buyers have always been conservative in this market. And as rates have increased, there has been a strong push back against current pricing. There is very little in migration in Minnesota, which makes pricing much more challenging because we have a limited pool of only local buyers. We have reacted with strong price reductions, competitive mortgage programs and we're solving to a mortgage statement that works, which is starting to rebuild sales.
Austin has been the most impacted market in Texas, following back-to-back years of 40% plus appreciation and bidding wars on available inventory. Higher rates in June and headlines on stock market declines and the distressed national economy has sidelined many buyers who are waiting for a reset in home values.
While inventory is limited, cancellation rates have increased and we've reduced prices in many communities on a home-by-home basis and have offered extremely competitive mortgage programs. These pricing adjustments are starting to generate increased sales activity. Fundamentally, Austin is positioned for long-term growth with low unemployment, higher rent occupancy, low to mid home inventory and strong projected job growth. Our communities in Los Angeles, Central Valley and Sacramento have experienced a significant slowdown with traffic dropping off considerably in late May and into June.
With the spike in interest rates, buyers in these markets have been extremely credit challenged and cancellation rates have increased with adjusted prices are using financing incentives and in some cases, have included non-leased solar systems as part of our home package to rebuild sales. Net new order prices remained higher than the year ago period and completed inventory for the most part has not been a problem. The issue continues to be a reset in pricing to solve to a mortgage statement that works in these markets. This is consistent with what Stuart said in his opening remarks.
Seattle was one of the strongest markets in the country over the last 2 years. The market saw strong integration, solid job growth and sales prices that grew approximately 20% annually in each of the last few years. While market fundamentals with limited land supply and low inventory remains extremely strong, buyers have pushed back for a reset in pricing. The higher priced and highly sought after locations around Seattle have seen a significant pullback in sales in May and early June. This pullback is a result of both continued price appreciation in the first quarter, causing concern over home values being overpriced and stock market corrections, which have had a direct impact on employee stock compensation plans.
We've adjusted prices in some communities to Q4 pricing and has seen a sales uptick with this correction, which demonstrates the underlying strength of the market. Once again, in this market, we are at prices that are still significantly higher than the year ago period.
I hope this gives you a better picture of our markets across the country and what we're doing to keep sales activity going. The markets remain very fluid, and we are making strategic decisions and adjustments every day. As we've said in the past, we're going to keep our homebuilding machine going, maintain our start pace and price our homes to market.
I'd like to now turn it over to Jon.