Homebuilders are having a rough start to the spring selling season amid high mortgage rates and tariff uncertainty.
On Monday, KB Home (KBH) reported a 17% drop in net orders from the year-earlier period for its fiscal first quarter ending Feb. 28. The company also dialed down its average selling price range for 2025 to $480,000 to $495,000. In January, it expected a range of $488,000 to $498,000.
Shares of KBH fell 4% in after-hours trading following the earnings report.
"While longer-term housing market conditions remain favorable, driven by demographics and an undersupply of homes, demand at the start of the spring selling season has been more muted than we have seen over the past few years," KB Home CEO Jeffrey Mezger told analysts and investors on the earnings call.
Many real estate agents and builders consider Super Bowl weekend, which landed on Feb. 8-9 of this year, to be the unofficial kickoff for the peak homebuying and selling season, which lasts through early June.
Read more: 2025 housing market — is this a good time to buy a house?
Mezger noted that the company typically sees a pickup in net orders in late January and early February. This season, that did not materialize, reflecting the hesitancy among buyers to purchase a home.
As a result, KBH lowered its guidance for 2025 housing sales to $6.60 billion to $7 billion from its previous forecast of $7 billion to $7.5 billion.
Overall, sales of new single-family homes rebounded slightly in February amid warmer weather and falling mortgage rates. But it's unclear if the momentum will last.
"If the builders can figure out what leverage to pull from an affordability standpoint, the buyers and the demand are out there, but it's not going to be as easy as it was," Wedbush Securities senior vice president of equity research Jay McCanless told Yahoo Finance in an interview.
This challenge is not unique to KB Home. The second-largest homebuilder, Lennar, reported a slight 1% increase in net new orders from the year-earlier period, totaling 18,355. However, the company projected lower-than-expected quarterly orders due to the tough housing market.
When it reported Q1 results last week, Lennar (LEN) forecast new orders between 22,500 and 23,500 for its second fiscal quarter, lower than analysts' estimate of 23,800 homes. While mortgage rates have decreased slightly, they are still hovering around 6.7%, prompting the builder to reduce its average sales price, after incentives, to $408,000 in the quarter, marking a 1% decline from last year.
"During the quarter, as we move past the beginning of February, we do not see the seasonal pickup typically associated with the beginning of the spring selling season," Lennar CEO Jonathan Jaffe told analysts and investors on the earnings call.
Consequently, Evercore ISI analyst Stephen Kim downgraded Lennar to In Line from Outperform, with a price target of $131, down from $159, following the fiscal first quarter report. The downgrade was driven by the second quarter gross margin guidance of 18%, which fell below expectations, with management attributing the decline to increased incentives compared to the first quarter.
Evercore ISI argues that Lennar's strategy to sustain incentive volume will result in its profitability "at dramatically depressed levels," Kim wrote.
To address affordability, builders may need to adjust home sizes, limit options, or "find other ways to skinny the price," McCanless said. For example, they might replace more extensive home plans with smaller ones, such as swapping 2,500-2,600-square-foot plans for 1,700-1,800-square-foot alternatives.
Another concern for builders is President Trump's executive order, effective in April, imposing tariffs on construction materials from Canada and Mexico. The National Association of Home Builders (NAHB) warns that this could raise the cost of imported materials by over $3 billion, with builders estimating an average rise of $9,200 per home.
This growing pressure is contributing to increased uncertainty among smaller builders, who are becoming concerned about the housing market's outlook.
Read more: The latest news and updates on Trump's tariffs
Wolfe Research highlighted this concern in its recent survey of private builders, noting that while orders increased by about 22% month over month in January, this growth was well below the typical 39% average seen in recent years. Smaller builders' confidence also took a hit in February, reflecting a three-point drop from January to its lowest level in seven months.
"At this point, for them to be able to drive much better demand without sacrificing margin, it's going to likely have to come in the form of lower mortgage rates or people regaining their confidence in the macroenvironment and in their employment situation, which both those parts are really out of builder's hands," Trevor Allinson, director and senior research analyst at Wolfe Research, told Yahoo Finance.
D.R. Horton (DHI), the nation's biggest homebuilder, is slated to report its fiscal second quarter earnings on April 17.
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
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