Want more housing market stories from Lance LambertsResiClubin your inbox?Subscribeto theResiClubnewsletter.During the pandemic housing boom, publicly traded homebuilders achieved record profit margins as home prices soared and buyer demand ran red hot. Once the national housing demand boom fizzled out in the summer of 2022, many large homebuilders began offering affordability adjustments (like mortgage rate buydowns) where and when needed to maintain their sales pace. Despite some profit margin compression, almost every major homebuilder entered 2024 with gross margins still above pre-pandemic 2019 levels.Recently, homebuilder margin compression has returnedjust ask Lennar. Recently, Lennar reported a Q4 2024 gross margin of 22.1%, falling short of the 22.5% the company had expected.The shortfall in margin [in Q4] resulted from increased incentives on homes sold and delivered within the quarter, Lennar co-CEO Stuart Miller said on the companys recent earnings call. Accordingly, we are moderating our expectations for margins and sales in the first quarter of 2025 as the market adjusts and stabilizes. Overall, the economic environment, which we believed last quarter was constructive for the homebuilding industry, has certainly turned more challenging as longer-term interest rates along with mortgage rates have climbed steadily since our last earnings call. During the call, Lennar CFO Diane Bessette stated that the company anticipates further margin compression, with gross margins expected to range between 19% and 19.25% for Q1 2025.If Lennars outlook is correct, Q1 2025 will not only see margins below pre-pandemic Q1 2019 levels but also the companys lowest Q1 gross margin of the past decade.Were going to adjust to market. Were going to maintain [sales] volume, Lennar co-CEO Stuart Miller said on the call.In other words, where and when needed, Lennar is cutting net effective prices through larger incentives to find the market and keep sales rollinglikely more so in pockets of Florida and Texas where active inventory has bounced back and buyers have gained leverage.Miller added, Let me say that while this has been a difficult quarter, and year end for Lennar, while the short-term road ahead might look a little choppy, we are very optimistic about the longer-term road ahead.Before the Lennar earnings report, many Wall Street analysts had already downgraded their short-term outlook for homebuilder stocks, triggering a pullback in the sector this month.In response to Lennars weaker than expected earnings report on Wednesday, Lennars stock price declined further this weekalong with the stock prices of many other publicly traded homebuilders tracked by ResiClub.Click here to view an interactive version of the chart below.What does homebuilder profit margin compression mean for the housing market as we head into 2025?If giant homebuilders make further affordability adjustments to move product, it could attract more homebuyers who might have otherwise preferred to purchase a resale/existing home, thereby putting additional upward pressure on resale inventory in 2025. This trend would likely be most pronounced in Sun Belt markets like Austin, Tampa, San Antonio, Jacksonville, and Dallas, where active inventory has already grown the most over the past two years. If that occurs, homebuyers in those markets could potentially gain some additional leverage and find better deals.