But the hot air was let out of pandemic-era gross margins, operating earnings, and net income. Sellers of existing homes should pay attention.
By Wolf Richter for WOLF STREET.
Homebuilder Lennar reported earnings yesterday evening, and along with its conference call today, aired out a litany of lamentations about the housing market: Revenues from homebuilding fell 8.8% year-over-year in Q3, incentives needed to make those deals jumped to 14.3% per home sold, which slashed its gross margin to 17.5% in Q3, from 22.5% a year ago. Operating earnings from homebuilding plunged by 49%, net income plunged by 50%, and earnings per share plunged by 46%.
Gross margins dropped “primarily due to a lower revenue per square foot [lower prices per square foot] and higher land costs,” that were only “partially offset by a decrease in construction costs,” the company said in its filing today.
The entire Pandemic Free-Money price spike got cut: Lennar’s average selling price in Q3 dropped by 9% year-over-year to $383,000, below where it had been in 2019, and by 22% from the price peak in Q3 2022, when FOMO-addled buyers were willing to pay whatever because money was free.
Lennar targets the mass market. It doesn’t target the high end. People who want to spend substantial amounts on a custom-built home will likely choose a different builder. Lennar’s homes are mass-market products, they expand the supply of homes that people can more easily afford, and more supply and lower prices are exactly what this price-ravaged market needs.
From Q3 2019 through the peak in Q3 2022, Lennar jacked up the average price by 25%. Lennar has now given up the entire price spike plus some, and the average price is below where it had been in 2019.
As result of the much lower average selling prices, sales held up: The company delivered 21,584 homes, which was up a hair from a year ago, and new orders jumped by 12% to 23,000 homes.
That message is lost on sellers of existing single-family homes whose sales plunged by about 25% from 2019 and by over 30% from 2021, because prices are too high, and sellers are loathe to budge. And homebuilders are now eating their lunch.
Hot air comes out of inflated gross margins. Lennar’s lower prices did the trick, kept volume up, and boosted its new orders – but they crushed the inflated gross margins from yesteryear:
- Q3 2025: 17.5%
- Q3 2024: 22.5%
- Q3 2022: 29.2%
That Q3 2022 gross margin of 29.2% was when money was still free, and when money is free, prices don’t matter, and homebuilders went on ahead and cleaned out these FOMO-addled homebuyers, generating huge profits for themselves and massive mortgages for the homebuyers, and a good time was had by all.
But the free money ended, and so there’s this litany of lamentations about “the continued pressures of today’s housing market,” and about the “incentives and price adjustments to match market conditions,” as Lennar said.
Lennar, like all homebuilders, figures the cost of incentives and mortgage-rate buydowns into the average price per home sold. So all of the costs of those incentives are included.
Incentives are not included by the Census Bureau, when it reports on new home sales, and bases its median price on contract prices of deals, and they don’t include the costs of mortgage rate buydowns and many other incentives, and without those costs, the contract prices have dropped far less than actual new home prices and understate the actual price drops.
As per the Census Bureau, the median contract price across the US by all homebuilders dropped by 5.9% year-over-year in July (blue in the chart below), and the three-month average (red) dropped by 1.8% year-over-year and by 5.9% from the peak in late 2022.
Lennar also cut its delivery expectations for Q4 “in order to relieve the pressure on sales and deliveries and help establish a floor on margin,” Co-CEO Stuart Miller said during the conference call today (transcript via Seeking Alpha).
“Sales volume was difficult to maintain and required additional incentives in order to achieve our expected pace and to avoid building excess inventory,” he said. Sellers of existing homes should pay attention.
In case you missed it: Condo Prices Dropped by 12%-27% in these 25 Bigger Cities through August: Condo Bust Update
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“Revenues from homebuilding fell 8.8% year-over-year in Q3, incentives needed to make those deals jumped to 14.3% per home sold, which slashed its gross margin to 17.5% in Q3, from 22.5% a year ago. Operating earnings from homebuilding plunged by 49%, net income plunged by 50%, and earnings per share plunged by 46%.”
Incredible !
Thank You for Your professional observations and reporting W.R.
Have a fantastic weekend ! 🍻
Good news for everyone, except homebuilders, their stockholders, homeowners looking to sell, etc.
Good news for folks like you and me.
Lennar is giving them away in my area. Offering 3.99% financing right now for 30 years (PMI on top of that), plus big discounts. Low income buyers are snapping them up (homes starting at $205 K)
I follow them in my snowbird area. They are now @ or below $160/ft2.
35% cut since I started tracking price.
All this and the real bubble crash hasn’t even happened yet.
What ought to freak out real estate investors is that pricing may never again hit their 2022 peaks in real terms. It took until 1970 for a real estate investor who bought in the 1929 bubble peak merely to recover the nominal value of their investments. With slower population growth and much less immigration you may never have real estate hit these prices again in real terms.
I’m going to laugh when the people who bought in to the stupidity go bankrupt – and especially so since many of the people who bought into it are also propagating it.
Solid analysis as always Wolf.
With multifamily there is at least some pretend and extend. You also have the ability to collect rent. You may never hit your IRR or equity multiple but you can still make a solid cash on cash if you hold long term. The problem is that many of those people jumped into multifamily during the free money era and know jack shit about how to operate a property.
Source – me, in multi-family and unfortunately know the jackasses who jumped in
Many of the older homes have larger lots, better location, zoning not allowed in compact builder HOA type projects. I see 3,000 square feet homes with no land in the 650 to 800K range. In my cul de sac, people have 2k sq ft to 5k sq ft homes going from 750K to 1.5mil all with land as in .9 of an acre to 2.5 acres with no hoa, and in the county right on the border to the city with radically different zoning advantages on my end and the complete opposite 1 block from my home where it becomes city although we both have the same town on the address. The point here is the complexity of each real estate situation always has exceptions of great value. People live here 10 to 50 years straight for the reasons stated. Schools excellent, shopping all over, freeway convenient, and the ability to build extra home, shop, barn or ?????