Lennar shocked the market by saying it’ll address this situation with further price cuts; its average price to drop by 16% from the peak in 2022.
By Wolf Richter for WOLF STREET.
Unsold inventory for sale of completed new houses spiked by 57% year-over-year to 124,000 houses in November, according to Census Bureau data today, the highest since June 2009 during the depth of the Housing Bust when homebuilders, stuck with a huge pile of completed houses amid plunging demand, were trying to survive.
Homebuilders are trying to find buyers for these completed “spec” houses by piling on incentives, including costly mortgage-rate buydowns, and by cutting prices. But obviously, they haven’t done nearly enough to trim their bloated inventories, which continue to balloon, and they’ll have to do a lot more to bring those prices and payments down.
This surge of completed, essentially move-in ready supply is good news for the overall housing market, though not for homebuilders, and not for homeowners that want to sell an existing property. These “spec houses” will need to be sold quickly because builders have sunk a lot of capital into them, and because builders are continuing to build at a faster clip than they’re selling them – though they’re selling them at a pretty good clip – thereby adding to the pile on a monthly basis.
This is the situation that Lennar warned about last week. Homebuilders’ efforts to sell these completed houses will pressure prices down further. The median price in November, reported by the Census Bureau today, which does not include incentives, dropped to the lowest since 2021.
Lennar expects that the average sales price (including incentives) of homes it delivers this quarter will be down by about 16% from two years ago. Lennar’s stock price has tanked by about 28% over the past three months. More on Lennar in a moment.
Unsold inventories for sale at all stages of construction – from not yet started to completed – rose by 8.1% from the already bloated levels a year ago, to 493,000 houses, the highest since December 2007. Supply jumped to 9.1 months.
Prices drop, incentives surge.
Big homebuilders cannot sit out this market, they have to build and sell homes because that’s their business, and they have to keep their businesses intact and keep their shares from tanking. So they’re building at lower price points, cutting prices of completed houses, buying down mortgage rates, and throwing in other incentives at a substantial expense to them – just to maintain sales volume by taking share away from homeowners that want to sell an existing property.
Despite the incentives and lower prices, sales volume is now below the targets that the big builders communicated earlier this year, while their incentive costs have jumped, and their margins are getting squeezed. The issue for them is that prices are still way too high, prices have come down, but they haven’t come down nearly enough.
The median contract price of new single-family houses sold at all stages of construction dropped to $402,600 in November, the lowest since September 2021 (blue in the chart below).
The six-month average, which irons out the month-to-month zigzags and includes the revisions, dropped to $415,800, the lowest since March 2022, down by 5.1% from its peak in October 2022.
These contract prices do not include the substantial costs to homebuilders of mortgage rate buydowns and other incentives, though they do include price cuts.
So here comes Lennar, one of the biggest homebuilders in the US. When it reported earnings on December 18 for its fiscal Q4 ended November 30, it dished up a mess:
“Consistent with our strategy of matching sales pace with production, we adjusted sales price, incentives, and margin in order to re-ignite sales and actively manage inventory levels,” it said.
Lennar reported for its fiscal Q4:
- Revenues from home sales fell 9.2% on a 6.7% drop of homes delivered and a 2.5% drop of the average sales price.
- Average sales price of homes delivered fell to $430,000 net of incentives, from $441,000 a year ago, and from $491,000 two years ago.
- Gross margin fell to 22.1%, from 24.2% a year ago, and from 25% two year ago.
- New orders fell by 2.7% to 16,895 homes, 11% below the “low end” of its guidance of 19,000 homes.
A 16% drop in the average sales price (net of incentives) from the peak:
- In fiscal Q3 2022, the average sales price was $491,000, the peak.
- Last quarter, the average sales price was $430,000.
- For the current quarter, Lennar sees $410,000 to $415,000, roughly a 16% drop from Q4 2022.
Gross margin guidance for the current quarter got slashed to 19.0%-19.25%, the lowest since Q2 2018, down from 22.1% last quarter, and down from 25% in Q4 2022, as incentives and lower prices are beginning to bite.
And Lennar said it will not provide gross margin guidance for its full fiscal year “until we have a better sense of market conditions as the year unfolds.”
Sales are decent, thanks to price cuts and incentives.
Sales of completed houses – supported by incentives, mortgage rate buydowns, and lower prices – are up about 14% from a year ago, and up 33% from two years ago, to 24,000 houses.
Sales of new houses at all stages of construction, from not started to completed, rose by 7.1% from a year ago, to 45,000 houses. Sales of new houses have been decent, unlike sales of existing single-family houses, where demand has withered because sellers are clinging to those too-high prices.
Annual sales of new houses in 2024 – based on the first 11 months of current sales data plus WOLF STREET’s estimate for December – rose slightly to 681,000 houses, a decent level and roughly on par with 2019, and higher than any of the prior 11 years:
By contrast, sales of existing single-family houses in 2024 fell to the lowest level since 1995, according to sales figures by the National Association of Realtors through November plus WOLF STREET’s estimate for December (historical data via YCharts).
Prices of new houses versus existing houses.
Over the past four decades, the median contract price (six-month average) of new houses exceeded the median price of existing houses nearly all of the time, with new houses being usually 10% to 30% more expensive than existing houses. This scenario has now changed.
And remember, for new houses, the Census Bureau collects contract prices which do not include the incentives and costs of mortgage rate buydowns.
But with mortgage-rate buydowns and other incentives included, the monthly payments of new houses are now out-competing monthly payments of existing houses, which explains why homebuilders’ sales have held up reasonably well, while sales of existing homes have plunged, as some buyers shifted from existing homes to new homes.
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What does this information portend for the widely discussed housing shortage across the US?
“Housing shortage” is a BS propaganda term used by the RE industry and its trolls to drive prices higher. There is no housing shortage. There is no shortage of homes on the market for sale. But prices are too high – that’s the problem, and so demand plunged, and lower prices will fix that problem.
So ignoring for now the huge new supply of multifamily (condos and rentals) coming on the market or already on the market…
Here is the supply of existing homes (red line for 2024). Over the past 8 years, only Nov 2018 had a slightly higher supply. That is plenty of supply. There is no shortage:
https://wolfstreet.com/2024/12/19/home-sellers-home-buyers-and-brokers-getting-used-to-the-new-normal-old-normal-6-7-mortgages/
I guess that squashes the CRE conversion idea. Plenty of houses out there.
Conversions take many years, and they will create new housing supply, and new supply is always good in bringing down prices and rents. Particularly, this new supply will be in central business districts, which is great because central business districts are dead at night, and this will put some much-needed life into them.
Realistically speaking, only a small number of office towers can be converted to housing.
But malls are easy to “convert” because they’re easy to bulldoze and have so much parking space. Stonestown Mall in San Francisco is being redeveloped into 3,000 housing units and a walkable main-street type of shopping and restaurant area, with a multiplex and big supermarket (in the old Macy’s department store). This stuff is exciting, but it’s so slow-moving.
When will prices actually fall to affordable levels? I’ve been thinking about this…if new homes are too expensive to construct to make a real profit, that means that homebuilders need to build them for cheaper. To build them cheaper that means they need to pay less for their raw materials or pay less for their labor.
If they pay less for their labor, I think employees may balk and they won’t be able to hire enough workers to build homes. If they can’t build homes at a profit, they will go out of business.
If enough new home builders go out of business, that means there is less supply on the market. Less supply leads to higher prices. But the prices are already too high for middle class workers. This is where I get stuck. What happens at this point?
There are many ways of reducing the costs of building a house, including by shrinking the builder’s profit margin. And that’s precisely what they’re doing right now, just not enough of it.
They are still making like 20% margins. Automakers can live just fine on 5-6% margins and grocery stores on 1-2%. So I’m thinking they can get squeezed a bit more and still do alright. They’ve just been taking advantage of their pricing power that customers (home price) & workers (labor) have allotted them
When push comes to shove for the big homebuilders, they can stop buying smaller homebuilders, they can stop share buybacks, they can stop paying dividends, they can stop paying executive bonuses… they have all sorts of ways of trimming their own fat.
There is another way to make homes more affordable: Make them smaller.
They’ve been doing that too.
WOLF – As a buyer, Here in my market there most definitely is a shortage of existing homes available for sale. I am a buyer and the inventory remains incredibly scarce. Most of the national increases are coming from FL & TX. Outside of these states (and some other Southern states) invetory is still very tight. I don’t like “months of supply” as a measure as I prefer acutal number of homes available. The low rate-lock effect is keeping a lot homes off the market. I do agree prices of existing are too high, but no one really needs to sell. No forced selling, no price discovery.
Is it available houses for sale or available houses for a sale at a certain price point? I’ve noticed that inventory is up in the area I live but still significantly higher than I want to pay.
I was a remodel contractor most of my life…framed and built several customs when I was young…shocked at prices for material . Many things twice there cost from ten years ago…bottom line fewer houses will be built..land prices and have to come down..
Government needs to sell BLM land and or select property on fringe of military base such as Camp Penalton near Oceanside California…just north of the harbor there…5 miles of beachfront property a third to a half mile deep… REIT will need to be limited in there Residencial holding…or be outlawed completlt 22% of sales during the pandemic went to REIT.like Blackstone…or it that Blackrock?
Musk and Ramaswamie can do a firehouse sale of potential properties..We must remember this is a land of We the People..as far as the illegals…the good ones…round them up and make them avaible as skilled,or unskilled labors…much like FDR did in the depression….
“bottom line fewer houses will be built..”
That’s just not the case. It’s just propaganda. Look at reality. They’re building more houses than there is demand for. 2024 was the third highest in new house sales since 2007.
Well, it’s a bit like the labor shortage we hear about as well.
For labor, there’s a shortage of potential employees interested in the work available at the wages offered.
For houses, there’s a shortage of buyers interested in the properties available at the prices offered.
It’s a conundrum, a mystery, an enigma as to what the employer or seller should do (maybe free coffee at work or better cookies at the open house)? /s
Amazingly the peak to trough on new units chart…but we are an empire of bubbles, bubble economics, bubble reality, bubble fake scripted sports, another president who was an actor with a scripted career from birth…the elites same old scripted empire…MC.
Well, it’s a bit like the labor shortage we hear about as well.
I don’t think there’s a problem with housing prices being high. If 65% of Americans own their homes, I’m sure they like these high prices. Or the 35% that left, many of them prefer to rent….no problem detected on that front.
As for the home builders, they’re still doing fine, selling and building, making money…laying people off isn’t a thing yet.
So the problem lies with the poor people who don’t have any money, the usual crowd.
Homeowners only like high prices if they can liquidate their home and fetch those prices. It benefits them and makes them feel rich. If they list their home at that price, and it never sells, they don’t win. So it’s meaningless. The only beneficiaries here of high prices are those locked into low rates. Everyone else is struggling with affordability, and high home prices also effect rent affordability. So if you’re cool with the situation, it’s probably only because you’ve paid off your home or have a low rate locked in. Otherwise, there’s an important factor that you’re leaving out here and it’s known as opportunity, sometimes referred to as the American dream. Most people would like opportunity to return for the average person. It’s more than just poor people who are uncomfortable with the current situation, it’s also the intelligent.
I think you’re overlooking the wealth effect and HELOCs.
Don’t forget higher property taxes and higher homeowners insurance. People really only benefit from the higher prices if they can sell without having to buy another equivalent at the same inflated prices.
And HELOC’s are debt, not income.
“I don’t think there’s a problem with housing prices being high.”
LOL. RTGDFA. But yes, homeowners like higher prices and for prices to go higher, and they like feeing richer every day when they look on Zillow, and they may be disappointed. They’re already disappointed in a bunch of cities but are still gloating in others.
This homeowner does not feel richer.
Property taxes, home owners insurance, are double digit increases
again for 2025.
bingo WOLF forgot that part
2024 brought 38% increase in insurance, 10-30% increase in property taxes
and repairs – $800 for water heater + installation
just did few repairs on home – lost 1 months rent and paid 1 1/2 months rent to do few repairs/upgrades
$3k
have new tenant which will likely stay the 3 years last one did
just lot $$$ upfront today
Many of us renters are forced to rent due to the cost of purchasing being so astronomically higher.
Locally the crap areas with run down houses are starting to break in price. No more does a tear down home 2 hrs from civilization demand nose bleed prices. There is no shortage of overpriced homes still. Cracks in the foundation maybe.
Time will tell. I’ve seen 2-3 houses in the past month or two I don’t immediately scoff at. But they are in low desirability areas and in bad shape. But the prices are at least starting to reflect that. Anything in a decent area is still way over priced for local wages.
I’ve been studying the market in the Dallas area for years now and starting to see softening, and seeing more and more back on the market listings and they are setting on redfin a lot longer.
I think we’re going to have a repeat of 2008-2010
One can hope
to much 1% cash out there
MW: 10-year Treasury yield ends at 7-month high to kick off holiday-shortened week
The yield on the 10-yr has not finished going higher. Let’s not forget that yield and price are inversely related, in other words bonds are in a nasty bear market after a prolonged bull market. Best guess, the 10-yr UST will hit 5.5% and perhaps higher before this is over. This does not include the possibility of Trump making matters much worse with his brash and unsophisticated approach to governing.
I heard banker selling CD to younger guy with couple $$ in IRA
pushing him into 5 year CD to get ‘higher’ rate
said they see rate cuts in 2025
—
fed can cut but when 10 year keeps going higher – oops
MW: Stock market will find it hard to rally unless the dollar and bonds calm down
I purchased a house recently. I had the option of choosing a new build and and older 2000s house. My agent was an old friend so we were able to speak candidly about much of the process.
I will say that I opted for the older house based on what I saw in the new builds. The construction is quite simply shoddy. In one of the built homes we toured, I was able to lift the granite countertop of it’s platform with one hand. Doors were not level and floors creaked across the entire upper portion of the home.
I am not saying that the Housing Bubble 1 era homes are much better, but the craftsmanship of the new home was just atrocious.
Where I live in SoCal, SFR prices have basically doubled over the 5 to 6 years. As far as I concerned prices need to drop by close to half to make sense for most buyers. One of the huge problems in the local market is the number of short term rentals and corporate owned homes. In some neighborhoods, short term rentals account for 25% of SFRs, and the percentage would be higher if not for city zoning.
DM: Veteran hedge fund boss reveals America’s fatal flaw ‘that will lead to a crash next year’… and why parabolic prices are a red alert
A market expert has warned that America’s ‘fatal flaw’ could lead to a market crash in 2025. America’s ‘addiction to government debt’ is its fatal flaw – and could lead to a stock market crash, an expert has warned.
Ruchir Sharma, who is an author and fund manager, said attempts to rein in the debt – now at a record $36 billion – will eventually weaken economic growth.
Sharma, who is chairman of Rockefeller International and worked at Morgan Stanley for 25 years, made the comments in a column for the Financial Times.
36 billion is a drop in the bucket.
He obviously meant 36 Trillion.