PulteGroup’s gross margins
PulteGroup’s (PHM) gross margins for 4Q15 came in at 23.5%, up 40 basis points on a year-over-year basis and down ten basis points from the third quarter. Pulte has doubled its gross margins since 2010 when it began its value creation initiatives to turn the company around.
Like most builders, PulteGroup was able to increase prices while controlling costs for most of 2015. It seems like prices have gone up about as far as they can, however. The company’s average selling prices increased 6% in the fourth quarter to $353,000.
Historically, real estate prices have correlated tightly with wage growth. Wage inflation has been stubbornly low since the Great Recession, and has averaged about 2% a year, versus home price appreciation in the mid-to-high single digits. Lower interest rates can offset that to some extent, but until we start seeing broad-based wage inflation, further price appreciation will be driven by scarcity.
Margins are still holding up for the homebuilding industry
The homebuilding sector, as measured by the SPDR S&P Homebuilder ETF (XHB), has probably seen its peak margins for a while. Over the past few years, the luxury sector has been booming, helping builders such as Toll Brothers (TOL). D.R. Horton (DHI) recently launched a luxury brand, Emerald Homes, and is seeing strong growth there as well.
Toll is in the McMansion business, and those homes have high margins. Now builders are targeting starter homes for Millennials. PulteGroup and D.R. Horton are well positioned here. Finally, builders that focus on the West Coast like KB Home (KBH) and Lennar (LEN) seem to have hit the point where buyers are balking at higher prices.