May 24, 2018

Home Builders Warn of Shrinking Profits

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Home Builders Warn of Shrinking Profits

Home builders have been reporting higher profits the past year, but they say appreciation will soon slow. They are warning investors that they likely will see a decrease in profit margins in the new-home market in the early part of next year, mostly attributed to the rising costs of building homes.

For example, homebuilder Meritage Home Corp. reported gross margins up 22.8 percent in the third quarter over 18.6 percent a year earlier. However, chairman and chief executive Steven Hilton said that Meritage’s margins likely would rise or stay flat for two or three quarters before starting to fall next year toward 20 percent or 21 percent.  

“The biggest impact for us, our margins, going forward is going to be land cost,” Hilton told investors on a recent conference call. “Particularly in California, it’s going to be difficult for us to replace [at economical prices] some of that land that we got at really good prices” in past years.

Builders often purchase land two to three years before they sell it. Land prices have been on the rise since 2012 and spiked this year. 

“That means that homes sold today are on land bought for relatively affordable prices in 2011 or thereabouts,” The Wall Street Journal reports. “However, homes sold in 2014 and 2015 will be built on land bought at significantly higher prices last year and this year.”

If home prices rises don’t outpace the rise in land costs, builders will see their profits shrink. 

Richard Dugas, chairman and CEO of PulteGroup Inc., said that the increase in land prices likely will have a “push-down effect” on profit margins. 

Source: “Home Builders Have Marginal Concern for 2014,” The Wall Street Journal (Nov. 1, 2013)

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