During the pandemic housing boom, publicly traded homebuilders achieved record profit margins as home prices soared and buyer demand ran red hot. Once the national housing demand boom fizzled out in the summer of 2022, many large homebuilders began offering affordability adjustments (like mortgage rate buydowns) where and when needed to maintain their sales pace. Despite some profit margin compression, almost every major homebuilder entered 2024 with gross margins still above pre-pandemic 2019 levels.

Recently, homebuilder margin compression has returned -- just ask Lennar. Recently, Lennar reported a Q4 2024 gross margin of 22.1%, falling short of the 22.5% the company had expected.

"The shortfall in margin [in Q4] resulted from increased incentives on homes sold and delivered within the quarter," Lennar co-CEO Stuart Miller said on the company's recent earnings call. "Accordingly, we are moderating our expectations for margins and sales in the first quarter of 2025 as the market adjusts and stabilizes. Overall, the economic environment, which we believed last quarter was constructive for the homebuilding industry, has certainly turned more challenging as longer-term interest rates along with mortgage rates have climbed steadily since our last earnings call."