Rising costs and rate buydowns are cutting into builder profits
One of the nation’s largest homebuilders is warning that the housing market is getting tougher – not quieter, but costlier.
Lennar may have beaten Wall Street’s expectations in its latest earnings report, but the company made it clear that delivering homes profitably is becoming more difficult.
In a call with investors, Lennar reported that net earnings hit $520 million on $7.6 billion in revenue for the quarter ending in February. Orders rose 1% year-over-year to 18,355, while deliveries climbed 6% to 17,834. Still, shares dropped more than 4% Friday after the company signaled that its profit margins are under growing pressure.
“While demand remains strong, persistently higher interest rates and inflation, combined with a downturn in consumer confidence and a limited supply of affordable homes, made it increasingly difficult for consumers to access homeownership,” said Stuart Miller, Lennar’s chairman and co-CEO.
Like many large builders, Lennar has leaned on incentives to keep buyers interested, particularly mortgage rate buydowns that help reduce monthly payments. But those discounts come at a cost. The company said its average home sales price, net of incentives, slipped to $408,000 for the quarter, a 1% decline from the same time last year.
Miller also noted that prices and rents are softening in many areas.
“Generally speaking, net prices for homes, together with rents in overbuilt apartment markets, have started to decline, as demand remains constrained by affordability,” he said.
Lennar’s gross margin for the quarter came in at 18.7%, and executives expect it to dip further to around 18% in the next quarter. That pressure comes despite the fact that the company is still projecting 19,500 to 20,500 home deliveries for Q2 - figures that meet current expectations from analysts.
Even with that level of activity, homebuilders are beginning to show signs of concern. The latest Housing Market Index from the National Association of Home Builders and Wells Fargo showed builder confidence in the single-family market fell to 39 in March, down three points from February and the lowest reading in seven months.
According to NAHB chief economist Robert Dietz, tariffs are part of the reason.
“Construction firms are facing added cost pressures from tariffs,” he said, citing HMI data showing builders estimate the typical cost effect of recent tariff actions is $9,200 per home. “Uncertainty on policy is also having a negative impact on home buyers and development decisions.”
The HMI survey also revealed that 29% of builders dropped their home prices in March, up from 26% in February. The average price cut held steady at 5%. Meanwhile, the share of builders offering sales incentives remained high at 59%.
Despite these headwinds, Lennar executives said the company is still managing well through supply chain negotiations and labor conditions. While tariffs and immigration enforcement remain sources of industry-wide anxiety, Lennar hasn’t yet felt direct impacts on costs or workforce availability.
“To date, we have had no impact to our cost from tariffs,” said Jon Jaffe, Lennar’s president and co-CEO. “We've been in discussions regarding the potential impacts of tariffs with our supply chain.” He explained that the company typically begins those negotiations by disclosing the margin reductions Lennar already takes, which leads to what he called “a constructive effort to identify alternative sourcing and material strategies.”
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Labor, too, remains steady – at least for now.
“Today, there's been no shortage of labor or impact to cycle time,” Jaffe said. “We expect to be as well positioned as possible should any disruptions present themselves.”
Lennar’s warning lands at a time when the national housing supply gap remains massive. A recent report from Realtor.com’s economic research team estimated that the US is short roughly 3.8 million housing units. At the current rate of construction, it could take builders more than seven years to close that gap.
“Despite an uncertain macro environment, we are optimistic about our business and remain focused on our mission of building a healthier housing market and bringing attainable homes to more people,” Miller said.
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