What homebuilder stocks are telling us about the 2025 housing market

During the Pandemic Housing Boom, publicly traded homebuilders achieved record profit margins as home prices soared and buyer demand ran red hot. Once the national housing demand boom fizzled out in the summer of 2022, many large homebuilders made affordability adjustments where and when needed to maintain their sales pace. Despite some profit margin compression, almost every major homebuilder entered 2024 with gross margins still above pre-pandemic 2019 levels.

Recently, homebuilder margin compression has returned—just ask Lennar.

This week, Lennar reported a Q4 2024 gross margin of 22.1%, falling short of the 22.5% the company had expected.

“The shortfall in margin [in Q4] resulted from increased incentives on homes sold and delivered within the quarter. Accordingly, we are moderating our expectations for margins and sales in the first quarter of 2025 as the market adjusts and stabilizes. Overall, the economic environment, which we believed last quarter was constructive for the homebuilding industry, has certainly turned more challenging as longer-term interest rates along with mortgage rates have climbed steadily since our last earnings call,” Lennar co-CEO Stuart Miller said on their Thursday earnings call.

During their earnings call, Lennar CFO Diane Bessette stated that they anticipate further margin compression, with gross margins expected to range between 19.0% and 19.25% for Q1 2025.

If Lennar's outlook is correct, Q1 2025 will not only see margins below pre-pandemic Q1 2019 levels but also their lowest Q1 gross margin of the past decade.

“We're going to adjust to market. We're going to maintain [sales] volume,” Lennar co-CEO Stuart Miller said on Thursday.

In other words, where and when needed—likely more so in pockets of Florida and Texas where active inventory has bounced back and buyers have gained leverage—Lennar is cutting net effective prices through larger incentives to find the market and keep sales rolling.

Miller added that: “let me say that while this has been a difficult quarter, and year end for Lennar, while the short-term road ahead might look a little choppy, we are very optimistic about the longer-term road ahead.”

Before the Lennar earnings report, many Wall Street analysts had already downgraded their short-term outlook for homebuilder stocks, triggering a pullback in the sector this month.

In response to Lennar’s weaker than expected earnings report on Wednesday, Lennar’s stock price declined further this week—along with the stock prices of many other publicly traded homebuilders tracked by ResiClub.

Click here to view an interactive of the chart below

What does homebuilder profit margin compression mean for the housing market as we head into 2025?

If giant homebuilders make further affordability adjustments to move product, it could attract more homebuyers who might have otherwise preferred to purchase a resale/existing home, thereby putting additional upward pressure on resale inventory in 2025. This trend would likely be most pronounced in Sun Belt markets, where active inventory has already grown the most over the past two years, potentially giving homebuyers more leverage.

Last month, homebuilding giant Lennar—ranked as the No. 2 homebuilder with 73,087 new home closings in 2023—announced that it is acquiring Rausch Coleman Homes, ranked as the No. 21 homebuilder with 4,437 new home closings in 2023. Rausch Coleman Homes operates in 16 markets across Alabama, Arkansas, Florida, Kansas, Missouri, Oklahoma, and Texas.

This week, Lennar disclosed that it plans to spin off its land banking subsidiary Millrose Properties as a real estate investment trust (REIT).

“The Millrose spin will work hand-in-hand with our previously announced purchase of Rausch Coleman Homes, which is based in Fayetteville, Arkansas. Rausch Coleman is led by John Rausch, a fourth-generation builder, who built his company into the 21st largest homebuilder in the country. We look forward to welcoming John and his extraordinary team to the Lennar family as John will continue to work alongside Lennar as a partner and many of the Rausch Coleman associates will actually join the company. This acquisition fits squarely into our strategic growth plan of acquiring companies in concert with our Millrose Property spin-off, where Lennar acquires the operating assets, including when and Millrose acquires the Land Holdings. This enabled Lennar to acquire with a limited investment and producing a high return enabled by the Millrose platform. Rausch Coleman builds in 12 primary markets across seven states and is the No. 1 builder by market share in six of these markets,” Lennar co-CEO Stuart Miller said on their Thursday earnings call.