Working with the Hello Magnolia tutorial & javafree modules it feels very unnatural to put source files directly in the webapp directory.
The magnolia.properties file should include a property (something like magnolia.livemodules.dir or magnolia.watch.dir) which specifies the directory that is watched for the "Javafree modules".

By default it should be set to a subdirectory of the home directory, but not the home directory itself. (Something like: ${magnolia.home}/livemodules).