The marks are still probably too damn high (new homes edition)

Riffing on the theme of interest rates go up, (levered) asset prices go down

• homebuilders are ‘reconciling prices to market conditions’ (because the marks were too damn high)

• discounts galore, from the nation’s second-largest builder

• margins compress (because lower prices, and more discounts, will do that)

• home values are falling (and have been for a while)

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The marks are still probably too damn high (new homes edition)

Just to continue riffing on the theme: when rates go up, (financed) asset-prices go down.

Asset-owners may not want to admit it (and if they don’t sell, they won’t have to, at least not all at once), but that doesn’t make it any less true. And as Random Walk’s been saying, this applies to houses too.

‘Reconciling prices to market conditions’

To wit, one of the nation’s largest homebuilders, Lennar LEN 0.00%↑, announced to the world: “the more houses we sell, the cheaper we have to make them.”

Lennar Q1’25

• “continued weakness in the market”

• declining gross margins

• average sales price down 1% yoy

• “continued to use incentives, including interest rate buydowns, to reconcile home prices to market conditions.”

“Reconciling prices to market conditions” is my favorite new euphemism for “prices are going down.”

But yes, prices are indeed going down:

ResiClub

Average sales prices (net of incentives) are basically back to 2019.

Lance correctly points out that this isn’t really an apples-to-apples comparison because the homes are smaller now, but for all the “unaffordability” and “all time highs” shenanigans, the average sales price is (to repeat) back to 2019 levels.

That builders are building smaller, cheaper homes to find the actual clearing price, has been going on for a while. That builders would price-to-market (unlike homeowners, who would just stand pat) was why Random Walk was bullish on homebuilders wayyy back in the day, and why Random Walk has said repeatedly, “ignore the ‘all time high’ indexes, because they are lying to you.”

When rates go up, asset prices go down. Even (especially) houses.¹ So, mostly this is more of the same.

Discounts galore

But even builders can reach the limits of what the market will actually bear, and those limits appear increasingly in-sight.

Incentives jumped to ~13-year high: