When times get tough in homes sales, watch what the homebuilders are doing.
Take Landsea Homes, a small builder that blossomed in California. It’s moving its headquarters to Texas as part of a nationwide growth plan.
But the relocation also comes as builders like Landsea suffer the pains of a sales crash that not only curtailed house hunting last year but also scared want-to-be buyers to walk away from sales contracts. Landsea, for example, said its cancellation rate was running a mind-blowing 72% for its Arizona sales near year’s end.
Moving the corporate headquarters from Newport Beach to Dallas won’t cost any Orange County jobs, the company says. It’ll be primarily senior executives, including CEO John Ho, on the move.
Homebuying’s turmoil did force the company to cut 8% of its workforce nationwide, though Landsea declined to give an exact count of workers cut. At year-end 2021, it reported 384 employees.
Landsea, a US spinoff from a Chinese homebuilder, started in 2013. One of its first big projects was in Lake Forest – the 500-home IronRidge community that finally sold out last year. Landsea has added operations in Arizona and Florida – roughly 70% of 2022 sales – and is now starting a Texas push.
The relocation, Landsea president Mike Forsum said in a statement, is “driven primarily to give us better efficiency and effectiveness in managing our bi-coastal business by being based in the center of the country in a central time zone.”
I’m betting a steep home-sale drop that made a mess of the business plans of every builder was a relocation factor, too.
Last year’s rising mortgage rates and a decided change of attitude among house hunters crashed the buying pace and forced price cuts across the industry.
So penny-pinching is the hot trend in homebuilding. A Newport Beach corporate address isn’t cheap nor is it a great look for a builder specializing in lower-priced housing.
Consider Landsea’s financial picture. It’s still profitable but the bottom line shrank: $26 million in fourth-quarter earnings vs. $38 million in 2021’s last quarter.
Sales also slowed. The company told Wall Street that 2023’s first quarter deliveries of finished homes would be between 400 and 445 units. Compare that with 703 in 2022’s fourth quarter.
Now, consider the estimated average prices of those closings. They’ll run $520,000 to $525,000 vs. $594,000 in the fourth quarter.
Then think about new orders: 1,432 in 2022’s first three quarters but only 88 in the year’s last three months. Yes, 88!
Fed chair signals increased interest rate hikes if economy stays strong
California’s economic revival is a light truck stuck in traffic
New bill aims to convert California’s offices into housing
Verizon raising rates on some older phone plans
Macy’s, Best Buy fourth-quarter reports underscore consumer slowdown
And Landsea stock, which traded for $10.50 around its Wall Street debut in August 2021, fell to under $5 late last year. Then a recent industrywide rally pushed it back above $7 this week. That’s because, like many builders, Landsea execs see an early 2023 rejuvenation in interest from house hunters.
Why the recent change in buyer sentiment? Well, the financial statements say new sales will be less profitable for now.
Landsea’s projected “gross margin” in the first quarter will run between 21% to 22%. That’s a profitability drop from 26.9% for all of 2022 and just below 22.6% for 2021.
Much of Landsea’s declines in margin, just like its peers, comes from heavily discounted mortgage rates offered as incentives for buyers.
And the translation of that financial lingo? Builders realize the pandemic era’s homebuying bubble has burst and it will take major price cuts to get buyers interested again.
Sellers of existing homes should note that.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at firstname.lastname@example.org