Homebuilder orders are rising but profits frequently shrink because of price cuts and incentives.
It is a tough contradiction for homebuilders as the incentives and price cuts are taking a bite of their profits, according to Realtor.com.
The website said that in earnings reports, Arlington, Texas-based D.R. Horton and Atlanta-based PulteGroup both showed a familiar split: Orders held up better than profits, while incentives and affordability pressure kept margins under strain.
D.R. Horton, for example, posted a drop in earnings and revenue, but said net sales orders rose 11%. PulteGroup, meanwhile, narrowly missed earnings per share estimates on a sharp decline in net income, but its net new orders grew 3%.
Realtor.com said that D.R. Horton CEO Paul Romanowski said on a call with investors that affordability challenges continue to loom over the market, and are pushing builders to offer generous incentives such as mortgage rate buydowns and closing cost contributions, in addition to outright price cuts.
Cautious Consumer Sentiment
“New-home demand remains impacted by affordability constraints and cautious consumer sentiment,” he said. “Our sales incentives increased during the second quarter, and we expect incentives to remain elevated for the rest of the year, with the level dependent on demand, mortgage interest rates, and other market conditions.”
PulteGroup CEO Ryan Marshall, meanwhile, had to explain to investors why Pulte’s gross margin on home sales in the quarter was 24.4%, below Wall Street expectations and down from 27.5% a year ago.
“Our ability to offer low fixed-rate mortgages and other incentives is certainly helping solve the affordability riddle for some,” he said. “But this comes at a price, as incentives in the quarter reached 10.9% of gross sales price.”
Realtor.com noted that for several years, homebuilders have responded to sluggish buyer demand by ramping up incentives, with the rate buydown one of their strongest weapons in a time of higher mortgage rates.
“The affordability crunch of this high mortgage rate market we’ve now been dealing with for several years is leading builders to offer serious incentives on homes they have for sale, whether that’s price reductions, mortgage rate buydowns, or free upgrades to build-to-order homes,” said Realtor.com Senior Economist Joel Berner. “Buyers are feeling skittish, and builders are willing to work with them to help them feel like they’re getting a good deal on their new home. But in order to stay in business, they have to make up the compressed margins on volume.”
Berner said that many builders are choosing to sacrifice profits on individual homes for overall sales count growth, because homebuyers are currently hard to pin down.
Preserving Momentum
PulteGroup’s Marshall acknowledged the company is deliberately using incentives to preserve momentum.
“Our expectation is that we’re going to continue to lean into the forward commitments,” he said, referring to rate buydowns and similar offers.
Still, deals offered by homebuilders probably won’t last forever, Realtor.com noted.
For buyers, now is a great time to pounce on deals for new construction, Berner said.
“By being so elusive amid their affordability pressures, buyers have forced builders to offer them high volumes of buyer-friendly deals. When buyer confidence eventually returns, these incentives may be gone, so savvy buyers will snap them up while they can,” the economist says.
