John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website DollarCollapse.com in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.
In early 2023, the stars appeared to align for another housing bust. Home prices were crazy high, consumers were over-indebted, and mortgage rates were rising towards the dreaded 7% level. Add it all up, and a bust at least as dramatic as that of 2007/2008 — when homebuilder stocks fell by 80% — seemed imminent.
Then, as bubbles frequently do, housing just kept going. Home prices continued their merry ascent, the homebuilders made even bigger fortunes, and their stocks continued to rise. Lennar’s price, for instance, more than doubled from its 2023 low to its 2024 high. Sorry about that.
Are the Homebuilders Finally Crashing?
Shorting the homebuilders was clearly premature. But this month, nearly two years after my ill-fated short recommendation, reality finally bit US housing.
Wolf Street’s Wolf Richter is doing a great job of tracking the unfolding real estate bust. Here’s an expert from this most recent post:
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.
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:
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.
Should We Short the Homebuilders Again?
Maybe…Trends, once in place, frequently continue for a long time. And this trend — unaffordable homes not selling until the cost of buying (price plus mortgage interest rate) falls by around 40% — appears to have legs.
On the other hand, once burned, twice shy. Let’s sleep on this and reconvene after the holidays.
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