On Monday, RBC highlighted varied pricing patterns in the homebuilding sector for November, noting a mix of pressures and modest improvements.
While overall pricing trends remained sluggish due to high rates and affordability challenges, some builders faced acute pressures as they worked to reduce speculative (spec) inventory by year-end. Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI) were among those experiencing particular strain.
The breadth of base plans with month-over-month price increases remained steady at 22% in November, unchanged from October, and slightly up from 21% in September and 17% in the previous November. Conversely, the number of base plans with price reductions increased slightly to 9% in November from 8% in October. Like-for-like base prices were flat month-over-month in November, mirroring the trend observed in October, and showing a slight improvement over the -0.1% seen in September.
Spec home pricing trends were mixed but still negative overall. The proportion of specs with month-over-month price increases grew to 37% in November from 28% in October, while the percentage of decreases fell to 42% from 49% in the previous month. The average magnitude of price changes for spec homes was -0.4% in November, compared to -0.7% in October. Spec listings per community saw a month-over-month decrease of 5% but an 8% increase year-over-year.
Total (EPA:TTEF) like-for-like pricing declined by -0.1% in November, which was slightly better than the -0.2% seen in the preceding months from July through October. The report suggests that while incentives remained high, there were noticeable differences across builders. Lennar was notably weaker, indicating potential further gross margin percentage downside risks for the fourth quarter and its first-quarter earnings guide on December 18. D.R. Horton also continued to show weak spec trends, whereas PulteGroup, Inc. (NYSE:NYSE:PHM) and Toll Brothers , Inc. (NYSE:NYSE:TOL) experienced slightly weaker base pricing but less negative spec pricing trends.
When examining different price points, the $400,000-$700,000 and over $1 million categories showed modest strength in base pricing, while the entry-level segment was weaker in both base and spec pricing. Geographically, the data remained mixed, with Florida showing base pricing in line with expectations but underperformance in specs, and Texas underperforming in both areas.
Considering these factors, RBC sees continued margin risks in the current market climate. Builder stocks have significantly underperformed in the past three months, with a 15% decline compared to an 8% increase in the S&P 500. However, valuations are still considered high due to the elevated starting point, suggesting continued near-term vulnerability for these stocks.
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