Shares of LGI Homes Inc. (Nasdaq:LGIH) enjoyed a rally in the second half of 2015, but the price has dropped since and may be poised to decline even further. As the bust in petroleum prices drags on, LGI Homes may face hits to its bottom line as housing prices decline in areas of Texas, where LGIH has over 50 percent of its inventory.

(Nasdaq.com)

Stark Home Price Declines

Home sellers are reducing prices and increasing incentives to attract buyers as the oil slump takes a toll on areas such as Houston. Meanwhile, home construction permits declined 26 percent in the third quarter of 2015 compared to the same period in 2014 in the Houston area, while sales of existing single-family homes in December dropped almost 10 percent versus December of 2014.

As a result, home builders are actively working to reverse rising cancellation rates and slowing sales revenues. For example, KB Homes (NYSE:KBH) offered price cuts in several Houston area developments and additional commissions to buyers’ agents to thwart the downward trends.

The average single-family home price in the Houston area declined approximately 7.5 percent to the $280,200 range from its record highs in June, according to the Houston Association of Realtors. Local experts and economists point to the slump in petroleum prices as the causative factor, as oil prices have decline from $100 a barrel in August 2014 to $30 and below.

LGI Homes Feels Pressure, Prices Significant Below Average

LGI Homes targets current renters in apartments near its new home developments often comparing low mortgage payments of $700 to $1,000 per month versus rental payments that may be higher.

While the average price of an LGI home rose 15.8 percent in the second quarter versus the same period the previous year, that average price is $186,197, significantly below the average price of a single family home. The company’s strategy involves keeping constructions costs low by building simple homes and using standard floor plans repeatedly throughout their developments.