By Nicholas G. Miller

Geographic trends in the U.S. housing market are turning inside out, sinking homebuilders' margins in regions that drove record-breaking profits just a few years ago.

In the West and South, where housing prices skyrocketed as populations shifted during the pandemic, homes are now languishing on the market. Meanwhile, in the East and Midwest, which experienced a pandemic-era exodus, homebuilders are now seeing their strongest demand.

Analysts say companies overbuilt in the South and West, overreacting to population trends, which have now slowed. That is forcing builders such as PulteGroup, D.R. Horton and Lennar to offer aggressive incentives to offload inventory in places such as Florida and Texas, especially now that high mortgage rates are broadly discouraging sales.

"We are experiencing less favorable demand out West and in our Texas markets," PulteGroup CEO Ryan Marshall said on the company's earnings call in late July, but he added that demand was still strong in cities such as Cleveland, Chicago and Indianapolis.

"The markets that are mostly East Coast are doing far, far better than some of our West Coast markets," said Hovnanian Chief Executive Ara Hovnanian on the company's earnings call last month, highlighting additional slowdowns in Texas and Florida.

The mortgage buydowns builders are offering to encourage sales in the South and West have slashed their profits.

PulteGroup's and D.R. Horton's most recent earnings each fell by about 25%. Hovnanian's third-quarter profit was equal to one-fifth of its third-quarter earnings a year earlier. Lennar is expected to report its third-quarter earnings next week.

According to Realtor.com, the Northeast has 51% less housing inventory than it did before the pandemic and the Midwest has 39% less. Conversely, inventory is up 6.6% in the West and 3.6% in the South compared with prepandemic levels. News Corp, owner of Dow Jones & Co., also operates Realtor.com under license from the National Association of Realtors.

The differences in regional inventory give builders more leverage in the Northeast and Midwest, analysts say.

In August, price per square foot rose 3.9% in the Northeast and 1.1% in the Midwest, but fell 0.9% in the South and 1.1% in the West. The West and South both saw an eight-day increase in the average time a home sat on the market. That compares with a three-day increase for the Midwest and a two-day increase for the Northeast.

The biggest drops in total housing value this year came from Florida, California and Texas, while the largest gains came from New York, New Jersey, Illinois and Pennsylvania, Zillow said.

Almost all of the largest homebuilders have outsized exposure to the South and West, analysts say. Florida and Texas alone account for 40% to 45% of most of the largest builders' new homes, according to Wells Fargo analyst Sam Reid.

"They're overbuilding there because the [population] narrative is fantastic," said Stifel analyst Brian Brophy. "They're underbuilding in the areas where the narrative isn't quite as strong, and those narratives aren't incorrect, but it's getting exaggerated."

The scarcity of new housing in the Midwest and East has allowed builders to raise prices there even as they offer whopping incentives elsewhere. Hovnanian raised net prices in 21% of its communities in the third quarter -- down from 71% in 2023 -- with many of those communities being in mid-Atlantic states.

Builders in the region may also be seeing a boost from people moving back to areas they left during the pandemic, Wedbush analyst Jay McCanless said.

There are some signs that builders may be trying to adjust to the new geographic landscape by starting to build more in stronger markets. According to Census data, building permits in July, a predictor of future construction, fell 10% in Arizona, 12% in California and 5% in Florida. Meanwhile, permits rose 42% in Illinois and 13% in Ohio.

Changes in builders' geographic strategy could have significant consequences for building products suppliers. Eagle Materials, for example, has a key presence in the Midwest, while supplier Titan America gets 60% of its revenue from Florida, which is currently the slowest housing market of any state, Stifel's Brophy said. Stifel and Bank of America downgraded Titan in July.

Still, it will be difficult for homebuilders to completely switch their geographic focus given that it takes time to buy land and establish local partnerships.

Instead, as well as increasing incentives, builders are trying to build cheaper houses to improve margins and address buyers' affordability concerns in slower markets. "It would be ideal if builders could pivot very quickly from one market to another, but they can't," Wells Fargo's Reid said.

Write to Nicholas G. Miller at nicholas.miller@wsj.com

(END) Dow Jones Newswires

September 12, 2025 14:04 ET (18:04 GMT)

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