“Our house is a very, very, very fine house, with two cats in the yard,” Graham Nash wrote — but life for homebuilders could be getting harder pretty soon.
The August housing market report was a mixed bag, amid slowing growth, a cooling labor market and tariff-driven inflation.
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U.S. single-family housing starts dropped 7% to a seasonally adjusted 890,000 units last month, hitting their lowest level since April 2023.
The decline was driven primarily by a 17% drop in groundbreaking in the South.
Overall housing starts fell 8.5% to a seasonally adjusted annual rate of 1.31 million units.
However, single-family completions advanced to a seasonally adjusted annual rate of 1.09 million in August, indicating that builders are working through existing backlogs.
“Housing affordability is hurting buyer traffic for builders, and as a result builders have slowed single-family-home construction,” Buddy Hughes, chairman of the National Association of Home Builders and a homebuilder and developer from Lexington, N.C., said in a recent statement.
“Nonetheless, our latest survey shows builders reported an increase for future market expectations as mortgage rates have posted a modest decline in recent weeks.”
Lennar’s CEO says the company’s results reflected continued softening of market conditions.
Lennar CEO: Sales volume was difficult to maintain
The Federal Reserve lowered its benchmark lending rate a quarter percentage point to a range of 4% to 4.25% at its recent meeting. The move makes borrowing cheaper, which can increase demand in the housing market and potentially lead to higher home prices.
Chris Versace, The Street Pro Portfolio’s lead manager, has been looking over the reports and has decided to stand pat regarding housing-related equity investments.
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“Over the last several trading sessions, our decision to remain on the sidelines when it comes to the housing sector has been confirmed by a growing number of data points, including disappointing August single-family-housing-starts data,” he said.
Homebuilder Lennar (LEN) recently missed Wall Street’s profit-margin and revenue estimates, and Versace said the results affirmed his concern about margins as homebuilders embrace incentives to sustain momentum.
“We say this because Lennar’s homebuilding operating margins for its August 2025 quarter plummeted to 9.2% versus 16.% in the year-ago quarter and almost 18% in the August 2023 quarter,” the veteran trader said.
“That is a sign of housing demand remaining weak and likely means homebuilders will be competitive to win the homebuyers that are in the market.”
Stuart Miller, Lennar’s executive chairman and co-CEO, told analysts he was pleased with the results against the backdrop of what might be the beginnings of an improving economic landscape for the housing market
But he also said the results reflected “the continued softening of market conditions and affordability through our third quarter.”
“Sales volume was difficult to maintain and required additional incentives in order to achieve our expected pace and to avoid building excess inventory,” Miller said during the earnings call.
“While our deliveries were just below our goal for the quarter, and while we sold more homes than expected during the quarter, these accomplishments came at the expense of further deterioration of margin, which came down to 17.5%,” he said.
Fund manager monitors housing data
As a result, Miller said, the company would reduce fourth-quarter and full-year delivery expectations.
“For Lennar, this is an opportune time to pause and let the market catch up a little bit,” he said. “Even though mortgage rates began to trend downward towards the end of the quarter, stronger sales have not yet followed.
“We have certainly begun to see early signs of greater customer interest and stronger traffic entering the market,” he added.
Although the short-term road ahead might seem a little choppy, Miller said, “we are very optimistic about our future.
“We are well aware that our numbers aren’t where we would like them to be, but neither are market conditions,” he said.
Lennar’s stock is down 7.5% this year and off nearly 31% from 2024.
When KB Home (KBH) reports earnings and August new home sales, scheduled for Sept. 24, Versace said he’ll analyze its margins and backlog trends, as well as the implied margin and pricing in its outlook.
“Should we see similar margin declines, odds are it will mean others in the group will report the same in the coming weeks, likely leading to lower EPS expectations for the second half of 2025,” he said.
Versace said he would also he would revisit his thinking on Builders FirstSource (BLDR) , the largest U.S. supplier of structural building products. The stock is in TheStreet Pro portfolio bullpen.
BLDR shares have continued to pull back even though the Fed added one more potential rate cut to its thinking, he noted.
“This reaffirms our view that we will want to monitor multiple housing-related data points, including key commodities and homebuilder margins, to determine when a sustained rebound in demand is taking shape,” Versace said.
“We will also keep watch to see if the sector falling out of favor is overly excessive, a situation that could lead us to patiently plant an initial housing seed for 2026.”
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