In Kris Hudson’s rundown of Lennar’s predictions for 2015, there are four that really stand out. While there is good news for home buyers and the broader economy, news for industry investors is less optimistic. 2015 will be a year that the housing market’s course finally begins to self-correct, and the impact will be different for each set of stakeholders in the industry.
- The Houston Market Will Drop
The new construction market in Houston has redefined the concept of a “hot” real estate construction market. The energy boom created a lot of jobs and drew a lot of support industries to the area. But the new downturn in oil prices will eventually trickle down into the Houston housing market. KB Homes and Taylor Morrison Home Corp. haven’t yet noticed much drop off as of yet, but Lennar has registered a slight impact in Houston. The firm decided to factor this activity into its 2015 outlook. Lennar president Rick Beckwitt says that, “we haven’t seen a significant change in that market condition. We’ve seen a little, at the higher end, of a pullback. We’ve anticipated…that there will be further reconciliation in that marketplace.”
- Incentives for New Homeowners Will Rise
Lennar joins its competitors in raining incentives upon buyers of new homes in their luxury developments. Free upgrades and financial assistance with closing costs are two major types of incentives being offered by developers. What seems to be a profit cut has proven to be a persuasive sales strategy for new home buyers. According to Lennar, its 2014 Q3 incentives program increased the firm’s sales revenue 6.6% from Q3 2013’s 6.3%. KB Homes and D.R. Horton have also adopted similar incentives to convince homeowners to buy now.
- Slowing Price Gains offset by Rising Sales
Lennar’s 2014 Q4 average home prices increased 7.2% to $329,000 in 2013 Q4. But 2013’s average price had increased 17.6% over 2012’s numbers. The price slowdown is welcome news to home buyers, who are seeing the highest median new home prices in three years. The slowdown is largely attributed to the shift from high-dollar properties to budget-scaled developments. As lending standards begin to relax, job growth increases, and student load debt programs kick in, the barriers homeowners have faced in entering the new home market will lower, and they will be seeking out entry-level homes. Lennar will being building several entry-level communities in 2015.
- Shrinking Gross Margins
Home prices are still lower than the market should be, but materials costs are rising, labor is short, and the land prices are very high. Although builders like Lennar have posted high gross margins in recent years—historically high, to be honest—their success has come from focusing on the higher-end properties for affluent buyers who qualify for mortgages. As they scale back to accommodate budget-minded buyers seeking less expensive homes, their gross margins will grow slimmer. Lennar predicts a 24% gross margin in 2015, down from 25% in 2014.