The fourth quarter earnings for 2023 saw public homebuilders ending the year on a high note as strong sales dominated the headlines. There’s an expectation that 2024 might experience a continuation of the homebuying surge that concluded 2023 on a positive note. This optimism is driven by a robust job market, steady interest rates, and a scarcity of available existing homes.
Sales of new homes saw a significant surge compared to the same period in 2022. Homebuilders reported increases from 30% to 86% from the previous year. This remarkable growth is largely due to the slight decrease in mortgage rates at year end and the pent-up demand for new homes.
With a few exceptions, profit margins remained stable compared to last year, showing no significant fluctuations in either direction. Most public builders reported profit margins in the mid-to-low twenties, with a select few reaching the higher twenties.
Across the country, 32% of homes for sale in the fourth quarter of 2023 were new construction, more than twice the historical norm of 10% to 15%. Newly built homes continue to consume a larger share of the for-sale housing market due to the decline in the number of homeowners listing their properties for sale. The spike in interest rates led many homeowners to hold onto their properties to maintain the low rates they secured during the pandemic. Although there has been a slight reduction in mortgage rates recently, the "lock-in effect" still poses a challenge to increased resale listings which bodes well for new home construction.
Production builders report that maintaining competitively priced homes amidst escalating costs and expenses is a major concern. The robust job market for top talent, inflation, and expansion into new markets must be balanced with raising home prices to compensate for these margin-eroding costs.
Land and Developed Lots
Builders are still increasingly adopting a "land light" strategy, engaging with third-party developers to meet their developed lot needs. This approach frees up capital, enhances liquidity, and boosts return on investment. By concentrating their efforts on acquiring pad ready lots to build and close homes, production builders are focused on their core competency—vertical construction—and leave the tasks of land entitlements and the development of horizontal infrastructure to land developers.