“Adjusted gross margin declined 140 basis points year over year and 90 basis points sequentially, which we believe was largely due to a lack of pricing power amid cost increases,” said Wells Fargo’s Adam Rudiger in a research note. “Consistent with our outlook for the sector in 2015, given more limited price appreciation and higher construction costs, we believe gross margin expansion will have to come from improved orders per /community.”
While he’ll be watching margins closely, Alex Barron of The Housing Research Center thinks cost pressures will make it hard to reduce margins.
All those headwinds are still present,” Barron says. “The only way builders can offset those pressures is by raising prices. To the extent they can’t raise prices they are going to see their margins continue to be squeezed unless they can find a way to pushback.”
What’s Going on With Oil?
In a recent note, Jay McCanless, senior equity analyst of Sterne Agee & Leach, commentated that Ryland acknowledged that it, like, a number of competitors, are seeing weakness at the above-$300,000 price point in Houston.
Some builders are already taking precautions. McCanless says TRI Pointe is attempting to renegotiate some Houston- area land contracts. “D.R. Horton is taking a cautious approach to Houston and to Midland because these areas have the highest possibility of oil-related weakness,” McCanless wrote.
With that background, Maklari will be interested in what comes out of earnings in those markets. “We’ll definitely be looking to get a sense of what’s going on in those markets and how resilient they are, and to see how the builders are positioning themselves in case there’s a turn [for the worse],” she says. “Maybe we’ll come through it and it won’t be that big of a deal, but, nonetheless, we don’t want to see them get that far ahead of themselves, either.”
